Up until last month, Clorox (NYSE:CLX) was overvalued in the market which demeaned its candidacy for immediate investment. Prior to the recent quarter, the company's sales showed lackluster growth owing to the recession that troubled the domestic and international markets in addition to forex related problems. However, recently the market dynamics have taken an interesting turn which impacted the company's financials in a positive manner. The following article details the recent industry changes and attempts to asses where the stock is headed in the future.
Ebola, the Flu, and the Rise in Disinfecting Wipes' Sales
The company continued to perform well and showed flat but positive performance even throughout the recent recession. The company offers a wide array of products ranging from bleach to salad dressing which gives it an added feature of defensiveness, meaning the company has the ability to perform better than most of its peers even during a recessionary environment. Although the downside risk is somewhat hedged due to its product diversification, the upside still exists. In an improving economy, the company is in a better competitive position to beats its peers. Clorox maintains a strong market shareholding in the US with half of the US population using Clorox's disinfectant wipes while approximately 60% of the population uses the company's liquid bleach. Therefore, it is an established fact that the company's shareholders continue to benefit from their investment regardless of the economic ups and downs.
Besides its defensive feature, the company is a leader in its business which adds to its strengths and helps it to propel forward. Up until now, the company was facing fierce competition at home as consumers looked for cheaper alternatives. However, the Ebola outbreak has induced consumers to seek quality products. The company aggressively marketed its disinfecting products with the onset of Ebola and flu season which contributed a lot to its revenues. The company reported a 20% YoY increase in the sales of its disinfectant wipes last month. In addition to the marketing efforts related to disinfectants, Clorox launched a new line of stronger wipes for heavy-duty jobs, bathrooms, and tougher stains which also helped to improve its sales.
However, although the domestic market has been showing improvements, foreign exchange continues to remain a challenge for the company and that is expected to continue for the time being. Note that minus the currency translations, the company's revenues would have reported a 3% YoY growth during the recent quarter. Through its recent history, Clorox's five-year cumulative revenue growth was around 1% while the EPS growth was approximately 2%. Part of this EPS growth is attributed to the company's share buyback program. However, going forward the improvement in the domestic market does provide hope for the future top line growth.
In addition to the domestic market improvement, Clorox is slashing company-wide costs which will add value to the bottom line. The company has been making efforts to cut its operating costs in order to improve operating efficiencies. Clorox's operating profit margin increased from 12.60% in FY2011 to 17.28% in FY2014 as it slashed costs year after year. Further cost cutting is planned for the future to elevate bottom line figures.
The company ensures that it generously rewards its shareholders. Clorox's dividend yield stands at 2.92% compared to the industry average of 2.22%. It is a noteworthy fact that the company has increased its dividend payments for the past 37 years since the inception of the first dividend. In addition to cash dividend payments, the company has helped elevated per share value through its aggressive buyback program which cushioned the EPS growth in the wake of slow sales growth. Note that Clorox bought back approximately 48 million shares over the last decade which significantly benefited the shareholders by enhancing their percentage shareholding and per share earnings and dividends.
The company's TTM P/E ratio presently stands at about 26 compared to the industry average of 25.2. Although the stock is not crucially undervalued in the market, it does have the potential to grow in the future and show meaningful price appreciation as sales improve in the domestic market. This is evident when one compares the company's current P/E ratio of 26 to its forward P/E ratio of 21.In my opinion, the company is a long-term buy.
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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.