Goldman assumed coverage of stocks in the Household and Personal Care, or HPC, sector with a mostly bullish outlook as waning inflationary pressures will be conducive to a return to volume growth in the sector after two years of consecutive declines.
On an aggregate basis, Goldman expects stocks within their HPC segment to grow at 4.3% this year and 3.5% in 2025, predicated on a faster deceleration in price growth. But compared to more favored categories for Goldman, like beverages, HPC will continue to lag the 5.1% growth rate Goldman pegs for the beverage sector.
HPC stocks have benefited from the Covid-led boost in demand in 2020 (who can forget toilet paper-hoarding) and elevated inflation and then hyper-inflation environment that followed.
However, HPC gross margins continue to lag pre-Covid levels although gross margins should return to normal levels with Goldman modeling 140 basis point gross margin expansion in 2024 for stocks in their HPC coverage to 53.2% (vs 51.4% consensus estimates). Goldman expects HPC names will re-invest this gross margin upside into marketing and innovation as focus shifts to durability of volume growth as a key driver going forward.
Looking at individual names, the bank maintained its Buy rating on Colgate (CL) given the company’s global share of the toothpaste market and gains in the pet food category. “We believe the company is poised for healthy top-line growth momentum ahead, especially owing to its emerging market exposure,” the bank said in its research report to clients. Expansion in the pet food category will likely support high-single digit EPS growth for the entire company which would ultimately support a re-rating from its current levels.
Church & Dwight (CHD) is also assumed at a Buy as topline growth has been driven by better execution and high-growth acquisitions like Therabreath and Hero, as well as innovations in laundry sheets, dry shampoo, and cat litter, all of which should support attractive growth.
Clorox (CLX) was given a Sell rating as the company will be entering a more competitive environment and as price gaps with private labels have widened at a time when private label share has picked up. Goldman views this as a less constructive promotional environment and as such, a headwind for Clorox (CLX).
Goldman downgraded Estee Lauder (EL) to Neutral from Buy as the lingering uncertainty around travel retail persists. To get more constructive on Estee Lauder (EL), Goldman would like to see more clarity on the pace of recovery in Hainan, China (a large market for travel retail) and the company’s cost savings initiatives to bear fruit.
As for the remaining names in Goldman’s HPC coverage, the bank upgraded Kimberly-Clark (NYSE:KMB) to a Buy from Neutral, downgraded Kenvue (KVUE) to Neutral from Buy, and rates Proctor & Gamble (PG) with a Neutral rating.
