Church & Dwight (CHD) and Clorox (CLX) have underperformed peers so far this year as margin woes and high valuations are keeping investors on the sidelines. However, we expect both these consumer packaged goods (or CPG) manufacturers to outperform peers including Procter & Gamble (PG), Kimberly-Clark (KMB), and Colgate-Palmolive (CL) with their sales and earnings growth rate, which in turn, could support the uptrend in their stocks.
Church & Dwight and Clorox are up 0.9% and 1.8%, respectively, on a YTD basis as of March 19. In comparison, Procter & Gamble, Colgate-Palmolive, and Kimberly-Clark have registered gains of 10.9%, 10.5%, and 5.3%, respectively.
The S&P 500 is up 13.0% and the Consumer Staples Select Sector SPDR Fund, which invests about 25% of its holdings in these five CPG stocks, is up 7.8% on a YTD basis.
The weakness in CHD and CLX could well be a buying opportunity, as we expect both Church & Dwight and Clorox to sustain the momentum in sales on the back of innovation-led products. Meanwhile, price restructuring initiatives are likely to support net sales growth. In comparison, the top line of PG, KMB, and CL are expected to remain pressured in the near term, reflecting heightened competition and an adverse currency rate.
Meanwhile, improved sales and cost-savings are expected to drive the bottom line of CHD and CLX. In comparison, the bottom line of CL and KMB are expected to decline, reflecting increased cost pressure and a higher tax rate. PG is expected to sustain bottom-line growth. However, the rate of growth is likely to remain lower than that of CHD and CLX.
However, the high valuation metric and cost headwinds could limit the upside in CHD and CLX stock.