A Hairy Industry With Smooth Prospects

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A sophisticated, daily men's grooming regimen isn't only for pretty boys anymore. Men's grooming has gone mainstream. As a result, male skin care has become one of the beauty industry's fastest-growing sectors. Recent studies show that men are more closely paying attention to their skin-care and grooming needs. Two manufacturers of men's skin-care products are positioned to win big, yet another company stands out as a loser.

Cleansers and razors and toners, oh my
The NPD Group, a leading market research firm, reported in a recent study that sales in the men's facial skin-care market grew 11% in 2011. Product manufacturers have taken note and are clamoring for a piece of this growing business.

Several companies have noticed and acted on this trend.

Company

Annual Sales Growth

Past 5 Years / Next 5 Years

PEG Ratio vs. Industry

Men's Skin-Care Product Lines

Energizer Holdings (NYS: ENR) (0.77%) / 11.33%1.03 vs. 1.65Schick, Edge
Johnson & Johnson (NYS: JNJ) 3.61% / 5.87%2.15 vs. 4.16Neutrogena Men
Procter & Gamble (NYS: PG) 4.33% / 7.38%2.22 vs. 1.65Old Spice, Gillette, Fusion, Mach3, Braun
Revlon (NYS: REV) 0.01% / 5.00%2.41 vs. 2.58Mitchum Man
Unilever (NYS: UL) 2.49% / 7.40%2.17 vs. 1.65Axe, Dove Men, Vaseline

Sources: Companies' 2011 annual reports, Yahoo! Finance.

Home run
While P&G attributes 9% of its net sales to its grooming segment, it derives 14% of its net earnings from it, clearly a very profitable arena for the company. P&G benefited from net sales growth of 5% in 2011 for its grooming segment, 2% of which came from pricing increases.

Undoubtedly, Procter & Gamble's acquisition of Gillette in 2005 proved a blockbuster move. P&G has capitalized on domestic growth in market share in razors and blades and offers complementary products, like body wash and facial products through its Old Spice product line.

And P&G isn't only growing business in developed markets; more than half of razors now sold in India are Procter & Gamble's Gillette Guard.

The growth prospects for Energizer Holdings look favorable. The company has great brand awareness with its Schick and Edge product lines, and Energizer's stock appears undervalued.

Seventh-inning stretch
I don't see anything particularly distinguishing about either Unilever or Johnson & Johnson here. While both are solid companies, neither stands out purely from the standpoint of capitalizing on the male skin-care market.

J&J appears undervalued, but this is skewed due in part to its industry average as a health-care company, not exclusively as a consumer products company. J&J's and Unilever's exposure to the male skin-care market in relation to their overall businesses is paltry.

Potential all-star
Male skin-care product line Jack Black (no relation to the actor of the same name) appears a relatively new, but formidable brand in this space. The privately held company was founded in 2000 by a former Mary Kay VP and her co-worker.

The award-winning Jack Black product line, which has graced Men's Health "Best Of" lists from 2005 to 2009, is sold at upscale retailers Nordstrom and Sephora. In my opinion, Jack Black is a pure-play brand to watch, and it's also a potential acquisition target for large companies like P&G, J&J, or Unilever.

A swing and a miss
I don't think Revlon is even getting out of the dugout, as the entirety of its male grooming product lineup comprises the Mitchum Man deodorant line. Revlon's sales have been flat for the past five years and free cash flow declined precipitously from $97.7 million in 2009 to $82.3 million in 2010 to $74.4 million in 2011, and only $29 million in the past 12 months. If you're looking to profit from growth in this industry, Revlon is a complete miss.

Bottom of the ninth
I see two ways an investor can play this. One can focus on the manufacturers of the male grooming products or the retailers that sell these products. Of the product manufacturers, I'm going to be keeping my eye on P&G and Energizer. Both are slated for impressive sales growth, and both stocks appear to be good values. Coincidentally, I like that both companies possess auxiliary battery businesses.

Both P&G and Energizer benefit from the successful "razors-and-blades" business model. The Motley Fool has recently identified one potential multibagger of a company that stands to benefit from a similar business model. Read about this one exciting stock in a free report here.

At the time this article was published Fool contributorNicole Seghettiowns shares of Procter & Gamble and Johnson & Johnson. In the spirit of full disclosure, she prefers a Schick Hydro 5 razor for her personal grooming purposes. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Unilever, Procter & Gamble, Johnson & Johnson, and Energizer Holdings and have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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