Cleaning product firm Zep (NYSE:ZEP) continues to see tepid demand from its core customer base, but is laying the groundwork for what could be solid and sustainable growth going forward. The stock is trending back towards its low levels over the past year, which has put the valuation in more reasonable territory.
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Second Quarter Recap
Sales improved 3.3% to $151.7 million. Management estimated organic growth at 1.1% and detailed that it saw solid trends in the retail sales of its commercial products. Home Depot (NYSE:HD) is Zep's largest customer at about 10% of annual sales and sales are also made to Wal-Mart (NYSE:WMT) and Advance Auto Parts (NYSE:AAP). Zep also remained active on the acquisition front and completed the purchase of U.K.-based Hale Group, a provider of liquid, powder and aerosol chemicals to the laundry industry.
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Higher commodity costs dented gross profits, but cost controls in the selling, distribution and administrative categories allowed operating profits to advance 4.1% to $4.9 million. A positive adjustment related to an acquisition helped send net income up 13.2% to $2.4 million, though higher shares outstanding resulted in earning per share growth of 10% to 11 cents per diluted share.
Outlook and Valuation
Analysts currently project modest sales growth of a couple of percent and total annual sales of $661.5 million. The consensus earnings projection currently stands at 97 cents. At the current share price of $14, the forward P/E stands at 12.
The Bottom Line
Zep sees the domestic market for cleaning and maintenance chemicals at more than $19 billion. Overall then, it is a very small player with a huge addressable market. Zep is approaching customers in various ways, including selling directly to its customers, through retail markets and through distributors such as Fastenal (Nasdaq:FAST).
Growth trends have yet to perk up, and could remain tepid, as Zep serves cyclical markets that include industrial, janitorial and government, the last of which is being subjected to growth pressures, thanks to lower tax revenue and excess spending. However, Zep is controlling costs and acquiring market share until organic growth trends improve. With any luck, the firm will someday resemble larger rival Ecolab (NYSE:ECL), which has grown sales and profits in the double digits for a better part of a decade. The market has awarded Ecolab's consistency with a forward P/E of 17.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.