Clorox: Expect An Armada Of Downgrades

Summary

• We had an extremely negative stance on Clorox coming into this quarter.
• The results proved us right.
• We look at where fair value lies on the beleaguered dividend aristocrat.
• I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Justin Sullivan/Getty Images News

It is rare these days to make a bearish thesis and be vindicated. The endless monetary largesse has expanded valuations and given companies a free pass. In the case of the company we are going to talk about today, not only did the bearish thesis materialize, it completely surpassed our highest (or should we say lowest) expectations. We dive into The Clorox Company (NYSE:CLX) and tell you where this one is headed next.

Our Stance

We first covered CLX in July 2020 and our stance was pretty much given away in the title of our piece.

Setting Up For A Decade Of Negative Returns

Underlying our thesis was a valuation straight out of the twilight zone. We provided historical examples why this would not work but were greeted by "boos" from the bulls. After the last quarter results, we felt that the bear case actually got a boost from the weak results. But what we saw this morning was far ahead of our worst-case scenario.

Current results

CLX has a fiscal year ending on June 30. For the fourth quarter, its results came in far below estimates on both top and bottom lines.

Following is a summary of key fourth quarter results. All comparisons are with the fourth quarter of fiscal year 2020, unless otherwise stated.

9% sales decrease (10% organic sales¹ decrease)

78 cents diluted EPS (68% decrease versus year-ago quarter)

95 cents adjusted EPS² (61% decrease versus year-ago quarter)

Source: CLX Press Release

For the full year, CLX disappointed the bulls on all fronts. Sales came in weaker and gross margins fell off the proverbial cliff. While adjusted earnings were down just 2%, one has to note just how much of those earnings were attained in the first two quarters of the fiscal year.

Source: CLX Press Release

Markets as we know are forward-looking, and even there, CLX did not drop a single piece of good news for the bulls. Estimated adjusted earnings are now going to be about $5.55/share.

Source: CLX Press Release

To see just how offside the analysts were versus the company's numbers you have to look at the consensus estimates.

Source: Seeking Alpha

This was one of the classical examples of groupthink where despite a pretty obviously telegraphed set of challenges last quarter, the lowest estimate for fiscal 2022 was $6.89.

Valuation, Outlook, & Verdict

CLX now trades at 29X times the midpoint of their guidance despite the pre-market drop.

Source: Seeking Alpha

Gross margins have been severely pressured by inflation and we think the next year will be challenging. We would note that gross margins were 37.1% this quarter (Y-Charts not yet updated) versus the longer-term average of above 40%.

Data by YCharts

The company guided for a 350 basis points drop in gross margins in fiscal 2022 (over fiscal 2021). In that sense, we think gross margins are likely to bottom in fiscal 2022. CLX should have enough pricing power to hold the line on that. Unfortunately, even if we assume that, the bull case is very hard to make on valuations. CLX would be a buy only at close to 2.0X-.2.4X sales and that number appears to be rather far off.

Data by YCharts

Keep in mind that CLX is guiding for a sales drop the next year so organically growing into this is a distant dream at best. On a dividend yield basis, investors are likely to demand at least 3% from this aristocrat thanks to the recent issues and that might help this stock find a floor near $140/share.

Data by YCharts

But whichever way you slice it, CLX is still not cheap after the pre-market drop today. Analysts are going to start their downgrade cycle and each and everyone will have to lower their EPS forecasts. CLX remains one of two consumer staples stocks that we are extremely bearish on and today's results improve the conviction in that outlook. We would look to get constructive once we get below $140 as that gets us closer to fair value.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[catbird]

52 week low was $156.23, so your $140 and lower for buy entry points never happened. Overly cautious strategy led to lost opportunity for rebound. CLX rose $6 to over $174 today. Are you recommending CLX now?

[Ttorre1027]

Time to be a contrarian!

[Perseverence]

Never underestimate quality…analyst,schmanalyst..
now $171…2.71% dividend…
please keep negative opinions based on fiction out of market reality!

[Murad Shawar]

@Perseverence FWD PE is still 30 and normal PE for a company like this is 17-18 MAX 20 FWD PE this still has a good 40$ drop to get down to 130 and at that price good margin of safety .

[Always Bullish]

Good analysis. There will be a time when the margin of safety says BUY but it’s but it’s not there yet. I’m afraid the new CEO over there won’t last and if they get one that is experienced it will scream BUY BUY BUY

[Ttorre1027]

Market Red..... CLOROX green. Great sentiment!!!

[Ttorre1027]

2nd wave pandemic play. Delta is coming for Fall and winter months!!!!!

[Perseverence]

Perseverence
05 Aug. 2021

Comments (279)
Perseverence
03 Aug. 2021
“@Trapping Value …
Don’t bet on it..tomorrow,
$165-$167…
I’ve bet on it !!”
Told you so..CLX will now make a slow climb back to $180…these products aren’t software or fashion!

Told you so….next stop $172-$180

[Ventureshadow]

@Perseverence Careful, TV is "extremely bearish" so could eat your picnic.

[thebrucemac]

I'm looking at starting a position in CLX. This article has given me solid information. I appreciate your efforts Trapping Value. The comments are also enlightening. I believe I will initiate at $140. Muchos gracias.

[Ttorre1027]

@thebrucemac good luck getting at 140. Going to need a recession

[thebrucemac]

@Ttorre1027
Look who is in the White House. That idiot can mismanage anything.

[Always Bullish]

Great analysis. It may very well get a lot cheaper providing us with a Margin of Safety buy

[earlyriser]

I had sold puts on CLX, thinking that it had been punished enough. I was wrong. Shockingly bad 2020 guidance, and I wasn't looking for much, had me reevaluating CLX. My model now says fair value at $141. Yikes! Covered puts at a loss. Valuation is way above fair value. Can't see why anyone would buy it here. There are plenty of stocks that sell at half the multiple that look attractive. NWL was my latest value add.

[Ventureshadow]

The one year chart of CLX is dreadful. It is close to a straight line with negative slope with no bottom yet. The "falling knife" doctrine applies. I see support possible at 160, and stronger support at 155, and these are not far away. I can see selling puts if it quits falling for a couple of weeks.

[Murad Shawar]

@Ventureshadow I see strong support at 140$ that is the bottom that being said no one knows I established a good sized position at 163$ also been in and out of this one about 5 times so far already made 15% trading it. Going long as it keeps dropping this is a world class business and its on a discount. If it goes below 140 risk is very limited at that point.

[usiah]

Looks like a plausible call to me.

[banmate6]

I'm still doing well with CLX in the investments I started with here: seekingalpha.com/...

I added to some of the above. But I am losing now in this relatively recent new CLX investment.

date shares total_price $/share
2-Mar-2021 25 $4,494.2500 $179.7700 basis
10-May-2021 0.149 $27.7500 $186.1995 div

A $4,494.25 basis is worth $4,108.84 , down $385.41. Not a disaster. I will hold. I'm thinking CLX still beats the S&P500 over the long haul.

At a forward PE of 21, that seems fair value for what I consider a blue chip. In a normal interest rate era, I say a blue chip has a PE between 18 - 22. I adjust to 20 - 24 for the low interest rate era we are in...which I believe will persist for 1-2 generations.

Let's see.

[Trapping Value]

@banmate6 P/E of 21?

[banmate6]

@Trapping Value

Yahoo Finance has a current forward PE of 21 vs current PE of 24.99.

For the last 5 quarters going backwards the current PE : 24.99, 20.18, 22.46, 28.56, 32.21. The forward PEs in the same quarters have been 29.68, 24.99, 20.18, 22.46, 28.56, 32.21.

It's simple, but I see this as a reversion to longer term norms. Mostly because the covid boost is over. Revenue and EPS going down. But if you look at the long term growth tab on SA for CLX, it doesn't go down long. Then starts a linear rise.

I think the worst is done. It's roughly fair value.

[Trapping Value]

@banmate6 They literally just guided to earnings which would make this a P/E of 30 which is there in the article.
You can always find hockey sticks in the estimates. Just as they were wrong here, they will be wrong ahead.

[Perseverence]

Perseverence
03 Aug. 2021

“@Trapping Value …
Don’t bet on it..tomorrow,
$165-$167…
I’ve bet on it !!”
Told you so..CLX will now make a slow climb back to $180…these products aren’t software or fashion!

[Marrk]

Started a position at $164.XX. I was going to buy at $170, but it just didn't work out.

Long CLX.

[mgmmdjd]

Check the price daily. Two shares when it declines more, then 3, 5, 10 and increasingly large lots as it goes lower and finally turns back up, as it inevitably will. I’ll keep buying as it rises. Impossible to know the bottom, as JK Galbraith said about experts on predicting the direction of interest: “There are only 2 kinds of experts - those who don’t know and those who don’t know they don’t know. This is how I’ve built small positions in F and GE, to which I’m still adding, and much larger positions over the years in AMAT and MSFT, up several hundred percent, and AAPL, where my pre-split cost basis is just under nine dollars. As a physician I prefer health-promoting products to empty calorie cereal products, and expect CLX soon be as miss-priced on the downside as it was on the pandemic upside. And to pay dividends while I wait to capture the capital gains I expect it to offer within a few years.

[SJArizona]

@mgmmdjd
I like your accumulation strategy.

What is your opinion on these two alternative strategies?

1) Selling puts just out of money?
2) DCA

I use #1 above to accumulate - but always wonder if there's a better way

[mgmmdjd]

@SJArizona Thanks for your comment. I’m afraid I’m totally unsophisticated when it comes to options & never use them myself, though I do buy CEFs, ETFs and ETNs that use them and are much better at it than I would be. Right now I’m speculating in commodity ETNs issued by Credit Suisse that sell covered calls in gold, silver and oil, in anticipation of substantial inflation around the corner. They are quite risky, I suppose, as their astonishing monthly payouts attest, but I’m not the most risk-averse character on the face of the planet, and I’m convinced the only way the US will ever be able to pay off its ballooning debt is with dollars that are worth 20 cents. The symbols, if you’re interested, are GLDI, SLVO, and USOI.

[mgmmdjd]

@SJArizona PS:: As to (2): My faith is in Reversion to the Mean, and my practice is, indeed, Dollar Cost Averaging.

[mgmmdjd]

Continuing: Sorry. I’ll cost-average down as it continues to sink. My IRA positions vary from $300 to over $100K. I’ll buy one share tomorrow and monitor it as I ch

[mgmmdjd]

I have no idea where the share price of this quality dividend-payer will bottom, but I want to be in it when it does. None of my 75 or so IRA positions is CLX, but I expect to nibble on it soon and cost

[718212210]

I would think most companies who make physical goods will experience the same things during inflation?

[Ttorre1027]

@718212210
They will just raise prices. Their competitors are in the same position. Means nothing but higher prices for all consumers.

[Ventureshadow]

Stansberry "porfolio solutions" had (and today still has) a strong buy on Clorox. It is one of about 12 stocks with their strongest recommendation. Kudos to you TV, you were right and they were not. Likewise a few months ago Value Line liked Clorox. Value Line has lately changed their position. I read and re-read your previous critique of Clorox until I felt motivated to close the puts I had written for a small loss. Thanks for your insights, TV. You may now refer to yourself as Trapping Value Line.