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The Clorox Company - Do Not Pay Too Much For Safety

Mar. 06, 2020 11:54 AM ETThe Clorox Company (CLX)4 Comments
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  • Over the last month, the Clorox Company has outperformed the S&P500 by a wide margin as it was considered a safe haven against the impact  of coronavirus disease on growth.
  • We think that the Clorox stock price upside potential from current value is limited as the stock is expensive according to both multiples analysis and our DCF model.
  • Moreover, company’s low revenue growth could weigh on margin expansion going forward.
  • In this scenario, we would not add Clorox to our portfolio now. In our view, only a decline of the stock to USD140 area would create a BUY opportunity.

Investment case

The Clorox company (NYSE:CLX) is a leading multinational manufacturer and marketer of consumer and professional products, which operates in four main area: cleaning, household products, lifestyle and international. As indicated by 2019 annual report, Cleaning is the largest and more profitable area of the company, with 36% of revenue and 53.1% of earning before taxes. Households represents 25.2% of revenue but only 10.1% of EBT as profitability has been penalized by the strong competition in the segment and by the recent losses of market share. Lifestyle has a share of 22% of revenue and 25.3% of EBT and, in our view it is the area with the best outlook in a medium-term scenario. Finally, International represents 16% of revenue but only 11% of EBT.

Clorox revenue and EBT split

Since January 29 the stock has outperformed the S&P500 by a wide margin: +9.7% against -5%.

We think that the overperformance is mainly due to investors' concern on the impact of coronavirus disease on global economic outlook. In our view, investors treated Clorox a safe haven as:

  1. The strong presence in the cleaning industry (36% of revenue and 53% of earnings before taxes). The coronavirus outbreak could increase the demand of the company's products in the segment to sanitize and disinfect houses and offices.
  2. The company obtains close to 85% of its revenue in the USA and it is only marginally exposed to a strong weakening of other countries' economies.
  3. Clorox's solid track record of dividend payment as the stock is included in the S&P aristocratic index having increased the annual dividend for at least 25 consecutive years. The current 2.5% dividend yield is attractive considering the 1% 10 years government bond yield.
  4. On the company front, latest results confirmed the gross margin expansion and solid free cash flow generation that

This article was written by

RadaEcoWatch profile picture
Analyzing economic outlook and specific company situations to discover market opportunities

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

It’s all about coronavirus, silly.
The way Clorox represents that it operates in four categories is off:

1. International isn’t a category in the sense that cleaning, household and lifestyle are.
Clorox isn’t international diversified and this may be a short-term strength but its a long-term weakness. Also one of the long-term structural drivers for FMCG is exposure to emerging markets consumers.

2. Household and cleaning aren’t two separate categories they one category for a FMCG company.
Clorox only separates these because it’s not very diversified in what it sells.

It is easy to misunderstand this business as it’s is often compared to ULVR, RB, and PG but it is nothing like them, not because it’s smaller but because it’s much more niche in that it’s only really a US household and cleaning product manufacturer.

Even CHD which has a similar lack of international exposure is much more diversified in terms of its product offering.

Clorox is great at what it does but as illustrated by this article be mindful of what your are getting exposure to.
Yeah....there is no reason to be optimistic about the only chemical that kills the coronavirus....none whatsoever....think about future earnings not the past.
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Wipe everything with bleachbit like with a cloth
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