IS CLOROX A “BUY?”

By Luis P. Lopez, Equity Analyst

The Clorox Company manufactures and markets professional and consumer products, such as cleaning supplies, vitamins, minerals, supplements, bags, wraps, cat litter, water filtration, food, and personal care products. The company also exports some of these products to other countries. 

Clorox is one of the few companies that benefited from the pandemic as the demand for its disinfectants and other home-use products accelerated due to stay at home orders issued by the government. However, the trend is about to reverse as the pandemic is losing strength. Let’s analyze different aspects of Clorox business to determine whether its stock is a buy in 2022. 

The surge Clorox enjoyed during the pandemic has started to subside, which was expected. But still, the company has been able to grow its revenue by a compound annual growth of around 3.5% over the past decade. The revenue growth rate of around 3.5% was sufficient to evoke a growth of a similar percentage in EPS. 

The company has increased its dividends fourfold over the last 15 years (between 2005 and 2021), raising them from $1.12 per share to $4.54 per share. At its current price, the stock’s dividend yield stands at 2.5% with a dividend payout ratio of around 63%. A healthy EPS growth rate of around 3.5% coupled with a sustainable dividend payout ratio will enable the company to increase dividends over time. 

Clorox Stock

At the time of writing, Clorox stock trades at $141 per share with a price-to-earnings ratio of 70.95. The current valuation is on the higher side even though the stock has lost around 20% year to date. Over the previous 12 months, the stock lost around 25% of its value. The recent fall can be attributed to the perceived loss of revenues due to reduced demand for the company’s disinfectants and other related production following the reduction in the new coronavirus case count. Clorox stock has comfortably outperformed its peers in terms of capital gains and dividends over the past 20 years.

Q2 FY2022 Financial Results

The company registered net sales of $1.7 billion in Q2 FY2022. The gross margin in the second quarter of the fiscal year 2022 decreased by 12.4% year over year from 45% to 33%. Earnings per share during the quarter were $0.66, which were down by $0.18 per share from the estimated $0.84 per share. However, in the same quarter last year, the EPS stood at $2.03, which was $1.37 per share higher than the EPS of the second quarter of 2022. Commenting on the second-quarter results, CEO Linda Rendle said, 

“In the face of a challenging cost environment, we’re executing well on the factors we control. We’re driving cost savings and pricing to mitigate inflationary headwinds, while also continuing to meet strong demand across our portfolio. And we’re keeping an eye on the long-term by investing in innovation, our brands and strategic digital capabilities”

Sounds like Clorox is feeling the heat from rising inflation. 

For financial reporting purposes, the company divides its business into the following segments:

1. Health & Wellness: Net sales during Q2 FY2022 declined year over year by 21%.
2. Household: Net sales during Q2 FY2022 increased year over year by 3%.
3. Lifestyle: Net sales during Q2 FY2022 declined year over year by 2%.
4. International: Net sales during Q2 FY2022 were flat year over year.

Dividend Payment

The company recently declared a quarterly dividend of $1.16 that was paid to the eligible shareholders on 11 February 2022. With the declaration of the quarterly dividend, the dividends totaled $4.64 per share annually with a dividend yield of 3.22%.

FY 2022 earnings guidance

The company updated its earnings guidance for FY 2022, with the expected earnings per share (EPS) to stay between $4.250-$4.500. The company expects to achieve revenue in the range of $7.05 billion to $7.27 billion in FY 2022. However, analysts estimate that Clorox will post a full-year EPS of $4.38 in the fiscal year 2022.

Analysts Estimates

Several analysts and groups set their price targets for Clorox, which can provide some insights into its future price. UBS Group revised down their target price on the stock to $148 from $163 with a sell rating. However, Goldman Sachs Group revised their price target on Clorox upwards to $159 from $141 but gave a sell rating to the stock. Several other groups, such as  Sanford C. Bernstein, Deutsche Bank Aktiengesellschaft, and Wells Fargo & Company also downgraded their price target and gave sell ratings to the stock.

Conclusion

Going forward, the stock may feel further pressure from the rising costs due to global supply chain disruptions and inflation. Additionally, as Clorox sells to many hospitals and large institutions, many of the company’s contracts are fixed price arrangements. Eventually they may be able to raise prices to pass on inflated input costs, but only after protracted haggling and negotiation. If inflation further accelerates, Clorox could feel the squeeze in the short term. 

The stock still seems expensive as suggested by its current P/E ratio of 70.95, even though the price has been drifting downwards, reducing its high valuation lately. But the stock is still valued at premium relative to it’s peers. Investors might be better off if they wait for the stock to dip further and build their positions by buying the dips.