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Over the past three years, Clorox (CLX) has surpassed its rivals in both stock performance and price to earnings ratios. This rise in the stock's price and its outperformance of its largest two rivals, Johnson & Johnson (JNJ) and Proctor and Gamble (PG), is a culmination of winning products ranging from Armor All to Glad Bags being large successes. Though from a product standpoint CLX is in a great position, from a financial prospective they are trailing behind JNJ in several key metrics: profit margins, debt ratios, Enterprise Value/Free Cash Flow and margin ranges. This activity is all occurring while simultaneously having a higher price/earnings ratio.

The reason that trading out of CLX is wise is because a large-cap stock within the consumer packaged goods sector is traditionally bought for security and strong dividend performance. What yields this level of security is having a slew of dependable products, a large amount of cash on hand, and a strong market position. Though CLX is a relatively strong company, what drives it down in regard to being a "safe haven" for investors is its debt situation, which inherently yields the stock being high risk.

Here are Five reasons why JNJ is poised to outperform CLX:

  • Let's look at the debt: Currently, CLX is holding $270 million in cash while having $2.6 billion in debt on its balance sheet. JNJ on the other hand has $30.93 billion in cash while having $18.36 billion in debt. This marks tangible evidence for why JNJ is in a safer position than CLX.
  • Profit Margins: CLX is currently operating with a profit margin of 12.66%, while JNJ is operating at 17.69%. These numbers suggest that JNJ is outperforming CLX and thus this provides another level of security and outperformance.
  • 5 Year EV/FCF: This barometer measures a company's ability to "pay back the cost of its acquisition or generate cash to reinvest in its business." The lower the ratio, the faster a company can do the aforementioned. According to a recent article in Finance Daily, CLOX is performing at a multiple of 17.8 in EV/FCF whereas JNJ is performing at a multiple of 12.6. This dramatic difference illustrates that both in a time of strength and difficulty, JNJ will outperform CLX from a financial basis.
  • Dividend: CLX is currently paying a dividend of 3.47% while JNJ is paying a dividend of 3.51%. This values are nearly identical, but being that JNJ is in a stronger financial position, the dividend is inherently safer.
  • Margin Ranges: In terms of margin, JNJ has outperformed all of its competitors according to S&P Capital IQ (See chart below.)

(S&P Capital IQ)

Why not PG? You may be wondering why JNJ is such a better buy than its counterpart, PG. The major differentiator between the two CPG companies is the larger multiple of debt that PG holds versus JNJ, and the fact that PG has fallen behind its competitors in terms of pricing. In Consumer Nation, Christiana Berk commented that "One big problem is that many of P&G's rivals have not followed its lead in raising prices in categories such as laundry and dish detergent, hair care and shaving. As a result, P&G is either treading water in these categories or it has lost market share to lower-priced rivals." These reasons coupled together show strong evidence for JNJ being the stronger company.

Stock Performance: Though these financial differences are in plain sight to all investors, CLX has traded consistently higher over the past three years and maintained a high price to earnings multiple. This disparity between stock performance and company fundamentals does not make sense, and thus for stability in the future, JNJ is a better stock to own.

(CNBC)

Earnings Report Tomorrow: Forbes reports that analysts are expecting "Johnson & Johnson to report earnings of $1.10 per share, up 6.8% from a year ago when it reported earnings of $1.03 per share." Traditionally, it is wise to wait until the hype over earnings has passed, but JNJ is a long-term investment and any short-term static will be eliminated due to how fundamentally sound JNJ financial situation is.

Conclusion: Although it may seem that CLX has outperformed its competitors in the past several years, JNJ holds the top place in the consumer packaged goods sector due to its consistent performance, high profit margin, low 5 Year EV/FCF, and large capital reserves. If you are looking for true stability in the coming years, JNJ is fundamentally a stronger CPG company to perform and provide safety for investors into the coming years.

Source: For Long-Term Stability, Sell Clorox And Buy Johnson & Johnson