How to Play the Growing Dirty Diapers Market

Opportunity beckons in developing and emerging markets for dirty diapers companies

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Jan 04, 2016
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China, which holds the title for being the world’s most populous country, recently docked the one-child policy, allowing its citizens to have more than one child without repercussions. The number of births, which has been rising globally over the last few years, is thus set to increase a notch in the future.

In addition, developments in health care programs and guidance and counseling provided to people across the world, and especially the developing countries, have played a crucial role toward lowering infant mortality rates. While family planning campaigns across the world are by no means muted, the emerging picture indicates that the number of infants will continue to rise in the foreseeable future.

One of the luckiest beneficiaries for increased number of infants across the globe will be the Baby Care Products industry, which features companies that sell baby foods and disposable diapers. An opportunity beckons in the disposable diapers market as more people continue to embrace the modern culture.

But first, who is in for the money?

Popular industry giants in the dirty diapers market will no doubt take advantage of favorable conditions and ramp up sales, but even more interesting is the fact that there are a few companies that focus on primarily this market that may go unnoticed by investors. These are the types of companies that possess compelling potential for growth and are able to deliver top-quality products at low production costs.

Of course there are not many companies that can do this, but Bemax Inc. (BMXC, Financial) is one of the few players that appear to be knocking down all obstacles to emerge as one of the best growth stocks to buy in the disposable diapers market.

Bemax is a company on the rise. In October last year, it launched its ecommerce platform “Bemaxinc.com/store” which subsequently generated $73,500 worth of sales within a month of launching. This is a positive signal for the company on its endeavors to increase sales streams.

The new ecommerce website serves and receives purchase orders from wholesale and retail customers. In addition to the $73,500 online sales, Bemax also received a purchase order valued at $260,000, which is bound to pay off in the next few months. The company is scheduled to release its next results on Jan. 14, where further details of these transactions will be revealed.

The company is targeting business in the developing and emerging markets, which, based on recent reports, indicate massive growth potential for disposable diaper sales. Currently, the disposable diaper market is valued at more than $29 billion (Nielsen) with North America, Asia-Pacific, Europe and Latin America accounting for the majority of sales reported.

This comes despite the fact that China has only 45% penetration, which means there is a lot of room for improvement. Given its relaxation of the one-child policy, dirty diapers companies could get a lot of business from this market in the coming years.

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In a report published by Nielsen last year, North America accounted for 34% of diaper sales in 2014, while Europe had 17% share. Asia Pacific and Latin America had 23% and 21%. However, when you look at the year-over-year growth rates, it is clear that Latin America and Africa/Middle East provide a compelling opportunity for companies operating in the dirty diapers market as standards of living continue to improve among most economies in these regions.

Generally, the diaper market is expected to grow at CAGR of about 4.6% through 2019. This growth will be driven in part by what I have already mentioned here (increased birth-rate and reduced infant mortality). In addition, increased government spending on health care, increased urbanization in developing and emerging markets, rising popularity of diaper pants, acceleration of global aging population and improved living and hygiene standards are also expected to boost growth.

There is growing demand for nonwoven napkin products and changing consumer behavior while focus on eco-friendly products is also playing a part. As such, there are a lot of factors that seem to favor increased use of diapers in the coming years, and this is what companies, large and small are pouncing on.

So how do you play the market?

For those who like stable companies that promise dividends, but with limited opportunity for growth, then Kimberly-Clark (KMB, Financial) and Procter & Gamble (PG, Financial) would be ideal choices. These companies have diversified portfolios that do not solely focus on baby diapers.

For instance, Kimberly-Clark operates through three business segments including Personal Care, Consumer Tissue and K-C Professional, which feature among others, swimming and training suits and various feminine products.

It is a well-diversified portfolio within the personal products industry in the consumer goods sector. This means that the company is unlikely to witness any major swings in stock price related to growth in the diaper market.

Nonetheless, investors looking for opportunities in such a stock can still rely on the impressive dividend yield of the stock, which currently stands at 2.79% for the forward 12-month period. Generally, with an average volatility rate of about 17% over the past 25 years, Kimberly-Clark is ideally an immobile stock. However, it is currently enjoying one of the best spikes in price in its entire history after rallying from $106 to $127 per share since July.

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Procter & Gamble, on the other hand, does have an even more diverse portfolio adding cosmetics, as well as health care and home care products, to its portfolio. The company also offers a better dividend yield at about 3.3%, but just like Kimberly-Clark, it has experienced limited fluctuation in price except for the 2008-2009 period which coincided with the global financial crises.

Kimberly-Clark’s Huggies premium diapers are its top brand in the diaper market, while P&G’s Pampers brand plays a similar role in the product mix. The personal products industry attracts a wide variety of players, with ecommerce players like Amazon (AMZN, Financial) and Target (TGT, Financial) also engaging in the business.

However, when it comes to delivering value for investment with regard to diaper market growth, these companies are likely to witness insignificant change due to their widely diversified portfolios. As such, finding a company that is specifically focused on disposable diapers stands a higher chance of delivering massive return on investment.

Both Amazon and Target sell multiple products and services on their platforms, and this means that their sales are affected by more than one product.

Bemax is implementing a specific business model that focuses on low cost of production while at the same time delivering quality affordable diapers to consumers.

The recent purchased order coupled by the obvious promising start to life in ecommerce shows that Bemax is on the right track towards establishing a strong customer base, which will spur future growth.

Conclusion

The bottom line is that there is money to be made in the dirty diapers market, and this opportunity is attracting all types of players including specialists, diversifiers, mega cap, large cap, small cap and micro-cap companies.

Regardless of the variety of players involved, investors will be assessing the companies from two perspectives: stable high dividend yielding stocks or risky high growth stocks. Whichever vehicle they choose, the dirty diapers market will be ready to deliver accordingly.

The growth metrics in the developing and emerging markets are of particular interest due to the fact that developed markets like North America already have a penetration rate of 95%. So investors cannot expect much to come from these markets in terms of growth going forward.

Bemax has already developed distribution channels in East and South Africa markets; these are some of the main entries into the African market. As a growth stock, the company can expect increased sales as use of disposable diapers in these markets grows.

Disclosure: I have no position in any stock mentioned.