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Ishan Majumdar
Ishan Majumdar
Articles (158)  | Author's Website |

These Surface Disinfectant Stocks Have Strong Upside Potential

Many listed manufacturers of surface disinfectant solutions have still not realized their full potential

The Covid-19 pandemic has given a significant boost to many industries such as manufacturers of gloves, masks, sanitizers, PPE (personal protective equipment), health insurance providers, and many more related areas.

Surface disinfectants are one such industry that has received a huge increase in demand as both consumers and businesses are on the constant lookout for solutions that can kill the SARS-CoV-2 virus on hard surfaces. With the rise in basic hygiene requirements, the consumption of high-quality surface disinfectants has gone up, and by my estimation, there are many companies whose stock prices still have room to benefit significantly from this rising demand.

Neogen Corp

Neogen (NASDAQ:NEOG) is primarily known as a company dealing in food and animal safety solutions all over the world. It produces products such as diagnostic test kits, sanitation tests, veterinary instruments, pharmaceuticals and vaccines to the food processing and poultry processing industry.

However, the company also has a vast range of disinfecting solutions. The company's disinfectants are used for surface cleansing in different types of animal care premises such as production livestock rearing to companion animal veterinary clinics. Its veterinary disinfectants are EPA (Environmental Protection Agency) approved and have the proven ability to destroy a wide variety of pathogens that cause diseases like avian influenza, foot and mouth disease, and so on. The company also assists its buyers with the complete process of disinfection using its products on different surfaces contaminated with organic matter, biofilms and serum content.

Food and meat processors are expected to be extremely cautious with respect to their internal hygiene, which makes a company like Neogen a high-potential bet. The company is debt-free and has an exceptionally good operating margin of 16.47%. Its enterprise-value-to-revenue ratio of 8.06 is marginally above the median for the medical diagnostics and research industry. However, even if this ratio remains constant, I think a string of solid results should propel this stock.

Cantel Medical Corp

Another heavily undervalued player within the surface disinfectant space is Cantel (NYSE:CMD), a New Jersey-based manufacturer of infection prevention and control products and services for the healthcare market. It deals in hospital supplies for endoscopy disinfection and water purification systems. Cantel's product range within the disinfection space includes solutions, sprays and wipes and its addressable market in terms of hospitals is a space with a very high threshold for hygiene.

Cantel showed its first glimpse of a solid financial performance last quarter when it produced a huge earnings beat. The company reported earnings per share of 40 cents, which was 53% above the forecasts, and is on track for double-digit top-line growth in 2020.

Despite this, it continues to trade at a ridiculously low enterprise-value-to-revenue ratio of 2.74, which is way below the industry average. The high-potential disinfectant provider has a price-book ratio of 2.68 and is significantly undervalued according to the GuruFocus Value chart.

Sonoma Pharmaceuticals

Sonoma (NASDAQ:SNOA) is a Georgia-based producer of hypochlorous acid products for various applications such as wound care, animal health care, eye care, oral care and dermatological conditions. The company's products are marketed in the U.S. and abroad.

It has gained significant momentum over the past few months after its announcement of its Nanocyn disinfectant and sanitizer passing various quality tests in different organizations all over the world. The company is partnering with Dubai-based MicroSafe Group for its disinfectant and sanitizer solution, which has entered the Australian market and has also been cleared for use on several airlines. In September 2020, the company also received authorization in Canada under the interim measure promulgated by Health Canada and can be sold into Canada as a hard-surface disinfectant.

Despite the recent momentum and the 61% stock price appreciation over the past 12 months, Sonoma's stock is valued as low as 0.65 times enterprise-value-to-sales, which is among the lowest in the industry. The management is gradually gaining approval in different countries for its disinfectant and sanitizer and could witness a strong jump in the top-line over the coming results.

Other key names

In my opinion, the above three companies are all high-potential players within the surface disinfectant space trading at very low valuations. However, investors who wish to play it safe could opt to go for established large caps with good surface disinfectant solutions, such as Kimberley Clark (NYSE:KMB), Clorox (NYSE:CLX) and Ecolab (NYSE:ECL). Much of their growth potential is already factored into their prices, though.

A solid micro-cap player within this space is PURE Bioscience (PURE), which released a phenomenal earnings result last week. The company's silver dihydrogen citrate-based disinfecting and sanitizing products have been in huge demand, which is why its annual revenues more than tripled from $1.9 million in 2019 to $6.9 million in 2020 as per its latest filing. The company reported a positive net income of $4,000 as compared to a net loss of $6.6 million in the same quarter of 2019. Its management has been carrying out a string of distributorship agreements and alliances to push sales. Despite this jump, its stock trades at $1.41, well below the GuruFocus Value line's fair value estimate of $2.

Overall, there is still a lot of steam left in the surface disinfectant space with plenty of compelling propositions to look at. In my opinion, all the above-mentioned stocks deserve a place on your watch list.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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