Jim Cramer's Sold The Clorox Bubble Which Opened The Door For New Investors
Summary
- Jim Cramer's call to sell Clorox helped pop a short term bubble in the stock as margin calls and profit taking exaggerated a horrible day for the stock.
- I expect continued outperformance of the stock, compared to the market, as coronavirus prevention potentially becomes a greater U.S. and international issue.
- Homecare, laundry, professional products, and international markets make up a significant chunk of Clorox's earnings that could see a significant boost in earnings in the coming quarters.
- Projection scenarios for the next quarter(s) and how they might lead to future earning and guidance beats and raises.
The Clorox Company (NYSE:CLX) had a dramatic recent tumble as the market held few favorites in a broad-based selloff that even included other major defensive plays like the SPDR Gold Trust ETF (GLD). Jim Cramer's morning Clorox sell call on February 28th, 2020, was timed perfectly as his charitable trust, along with other investors, took profits in Clorox and other defensive stocks. This happened as market fear reached a breaking point as overextended investors received margin calls and needed to raise immediate cash in a crashing market. An over 5.5% move down for Clorox by the end of February 28th on over 4.7 million shares (4X-5X normal volume) traded, according to Nasdaq.com, shows exactly just how bad that day was for current shareholders.
Screenshot from Twitter.com
This was, of course, a perfect opportunity for new investors to jump into a defensive stock like Clorox that could handily outperform the market in upcoming coronavirus inspired months. The massive volume of that day allowed many long-term and bubble investors the chance to gracefully exit, thus allowing new investors, seeing a potential significant increase in cleaning and sanitizing activities across the U.S. and internationally, the chance to enter. Since that fateful day and call by Jim Cramer, Clorox has handily outperformed both gold and the broader market.
Data by YCharts
I see continued outperformance for Clorox over the next quarter or two as the coronavirus spreads globally and becomes more and more of an issue across pockets of the U.S. One of the main way to combat the virus, at this time, is preventative measures including enhanced cleaning and disinfecting along with the continued intelligent closing of conventions, reduced travel, and the general avoidance of large social gatherings. This means the potentially heavy use of name brand Clorox bleach, wipes, and professional products across businesses, homes, and schools in the coming months as Clorox knows cleanliness.
With ~$6.2B in full-year 2019 sales, Clorox's home care, laundry, and professional products division compromised a significant 34% of the company's U.S. sales. That doesn't even include the 16% in international sales that the company had in 2019 as well. This segment is also most likely growing rapidly as countries outside of China have had some time now to prepare for the eventual global viral spread of coronavirus by rapidly producing or importing cleaning products from companies like Clorox.
Slide from Clorox's Q2, 2020 Earnings Presentation.
Now let us take a look at some upcoming quarterly projections using Clorox's $1.45B in revenues last quarter as a base. I'll be using $725M as the growth base I'm concerned with as cleaning products make up 34% of Clorox's sales while international compromises 16% of sales meaning that together they are ~50% of the company's total quarterly revenues. I'll then compare some of the company's current numbers and ratios to scenarios where sales for the next quarter or two grow by a hypothetical 10%, 25%, 50%, or 100%. These resulting numbers are then added back in to the otherwise conservatively assumed flat $725M in sales for its household and lifestyle divisions. Projections and ratios are based on a current Clorox stock price of $175.
| Current | +10% | +25% | +50% | +100% | |
| Growth Revenue | $725M | 797.5M | $906.25M | 1,087.5M | $1,450M |
| Total Revenue | $1.45B | $1.52B | $1.63B | $1.81B | $2.175B |
| Earnings | $6.35 | $6.67 | $7.14 | $7.94 | $9.53 |
| P/E | 27.56 | 26.24 | 24.51 | 22.04 | 18.36 |
| Total Debt | $3.15B | $3.15B | $3.15B | $3.15B | $3.15B |
| EBITDA | $1.28B | $1.34B | $1.44B | $1.6B | $1.92B |
| Total Debt/ EBITDA | 2.46 | 2.35 | 2.19 | 1.97 | 1.64 |
Free Cash Flow | $0.8B | $0.84B | $0.9B | $1B | $1.2B |
| Free Cash Flow/ Total Debt | 25.4% | 26.7% | 28.6% | 31.7% | 38.1% |
Table by Trent Welsh
Notice how fast the numbers can start to change if there is a huge surge in sales over the next quarter or two for its main consumer and international divisions? It doesn't take much for its currently bloated ~27.56 P/E to come back down to earth (or even appear cheap) considering how much bleach, wipes, and other professional products the company could be selling in the coming months and quarters even if its other divisions continue with flat sales.
Significant growth in free cash flow in the coming quarters could mean a nice chunk of total debt paid off. Clorox could also start stockpiling cash for future shareholder buybacks under its current $2B 2018 program as it should continue to aggressively grow its amazing dividend, currently ~2.53%, over time no matter what.
Slide from Clorox's Q2, 2020 Earnings Presentation.
Jim Cramer, aided by profit taking and margin calls in a panicked market, helped pop a recent small bubble that had been forming in Clorox after its tremendous run so far over 2020. This helped create space in the name for new entrants as I see continued outperformance for the stock over the next quarter or two as coronavirus spreads across the globe. Clorox's smaller market cap size, compared to other consumer products companies, along with its market leading cleaning products could see a signifiant growth in sales domestically as well as internationally. This could help Clorox's bloated looking valuation metrics look cheap in a hurry as it could boost its cash horde for future buybacks, or pay off a chunk of debt, as it undoubtedly will continue its aggressive dividend growth. I continue to see and expect good gains and defensive behavior from my Clorox investment and article as the stock continues to make up over 8% of my total portfolio at this time. Best of luck.
This article was written by
Analyst’s Disclosure: I am/we are long CLX. 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.
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