Shares of specialty chemical products provider Zep Inc. (ZEP) have risen 30% in the last five days since the company announced better-than-expected first-quarter results last week. As of this writing, the stock is trading around $22.
Zep, a spin-off from Acuity Brands Inc. (AYI), began regular trading on the NYSE on November 1, 2007. The company produces over 3,500 sanitation and maintenance products for professional use, including detergents, disinfectants, hand cleaners, degreasers, deodorants, lubricants, floor finishes, and pest control solutions. Zep's proprietary brands include Zep, Zep Commercial, Zep Professional, Enforcer, and Selig.
Zep's customers include government entities and businesses ranging from small sole proprietorships to large corporations like The Home Depot Inc. (HD), Wal-Mart Stores Inc. (WMT), Ace Hardware Corporation, True Value Company, Lowe's Companies Inc. (LOW) and Menard Inc. The company derives a major part of its revenue from the U.S. The company's fiscal year ends August 31. In fiscal 2009, the U.S. accounted for 78% of the company's net sales, followed by Canada's 12% and Western Europe's 10%.
Hurt by a challenging economy, earnings dropped significantly to $0.43 per share in fiscal 2009 from $0.77 per share in fiscal 2008. Zep's annual sales also fell to $501.0 million from $574.7 million a year before.
However, with stabilization in end market demand and helped by cost-cutting and restructuring activities, Zep's earnings and cash flow substantially improved in the just-reported fiscal 2010 first-quarter, despite slightly lower sales. In the first-quarter ended November 30, 2009, the company earned $5.42 million or $0.25 per share, compared to a loss of $1.54 million or $0.07 per share in the year-ago quarter. Sales for the quarter declined slightly to $126.8 million from $129.2 million in the comparable quarter a year before. Both earnings and sales for the quarter topped analysts' estimates.
The company has been expanding margins and growing share with new and existing customers. Zep's gross profit margin was 55.1% in the first quarter of fiscal year 2010, representing a 265 basis point improvement from the first quarter of fiscal year 2009 and a 180 basis point improvement from the fourth quarter of fiscal year 2009.
Analysts are bullish about the company's future earnings prospects. Over the last seven days, analysts have revised up the consensus estimate by 2 cents to $0.14 per share for the second-quarter of fiscal 2010 and by 18 cents to $1.10 per share for fiscal 2010.
Zep estimates that the total size of the retail cleaning chemicals market is about $5.8 billion and is mainly aggressive with its retail focus. In September 2009, Zep inked an agreement with retailer Advance Auto Parts Inc. (AAP) to make its products available to more customers and through more channels. Advance Auto Parts, which has 3,400 stores and website, now offers a line of Zep Commercial Auto Aftermarket products through its Commercial Sales program.
Acquisitions have been a part of Zep's long-term growth strategy. Last week, Zep loosened its purse strings to acquire privately-held Amrep Inc., which specializes in chemical formulations intended for the automotive, fleet vehicle maintenance and motorcycle segments for about $64.4 million.
The acquisition added Misty, Next Dimension, i-Chem and other Amrep proprietary brands to Zep's quiver. Toyota, Nissan, Sears and AutoZone are some of Amrep's top customers. The deal is expected to expand Zep's product portfolio with nationally recognized brands and compliment its existing customer base.
Excluding transaction costs, the deal is expected to be immediately accretive to earnings and provide about $100 million in annualized revenue. Zep anticipates annualized cost savings of $3 million-$4 million as it enters fiscal 2011 and up to $7 million within 24 months.
Zep holds over 3% share in the United States cleaning maintenance chemicals market. The acquisition of Amrep increases the available market for Zep from an estimated $16.3 billion to $19.1 billion.
Zep continues to grow its sales force - the lifeblood of the company, and is also planning to make investments to execute plans for acquisitive growth. The company's total cash as of the end of the first-quarter of fiscal 2010 was $16.11 million.
The specialty cleaning chemicals industry, which is resilient to economic downturn, enjoys growth consistent with GDP due to favorable end-market demographics and consumer demand for cleanliness. With the company experiencing increased demand for its products, Zep may be worth keeping an eye on.
by RTTNews Staff Writer
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