Zep Looking To Clean Up

By Ryan C. Fuhrmann | June 13, 2012 AAA

Zep (NYSE:ZEP) boasts more than 200,000 customers on a global basis. Commercial enterprises, industrial producers, institutions and consumers all utilize its cleaning products. With less than $1 billion in sales in a market it sees as a $75 billion opportunity, Zep should have plenty of room to grow and acquire market share.

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Recent Developments
Last week, Zep announced it would be taking advantage of the weak sentiment in Europe and buying private-label cleaning product provider Mykal Industries. Mykal reported $7 million in sales last year. This continues on a steady string of acquisitions over the past couple of years as Zep waits for organic growth trends to perk up.

SEE: Analyzing An Acquisition Announcement

Zep estimates that approximately 44% of industry sales go through distributors, 35% stem from retailers and 21% are made directly to customers. It is looking to grow in each of these areas. Last year, 61% of sales went to its small business and government customers and 23% went to automotive and industrial distributors, while 16% was through the retail channel.
Outlook and Valuation
Analysts project modest total sales growth, with total sales of $661.5 million in 2012, and a 5% increase for 2013 with total sales reaching close to $700 million. The average profit projections currently stand at 97 cents and $1.19 for these periods, respectively. This puts the forward earnings multiples at 13.5 and 11.

SEE: Whisper Numbers: Should You Listen?

The Bottom Line
Over the long haul, Zep plans to grow sales faster than the overall market, cut costs to improve operating margins to around 50 basis points annually and to expand earnings at an 11 to 13% annual clip. It is also targeting a return on invested capital of at least 15%.

SEE: Find Quality Investments With ROIC

Since being spun off from lighting firm Acuity Brands (NYSE:AYI) back in 2007, tough economic conditions have kept Zep from delivering on its long-term goals. Its stock price has also barely budged over the last five years. With any uptick in growth, the stock could start to move and the valuation could expand closer to rivals including Ecolab (NYSE:ECL) and WD-40 Corp (Nasdaq:WDFC), which each sport P/E multiples close to 20.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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