There's little doubt that The Clorox Co. (CLX, Financial) will see its growth slow down as the Covid-19 pandemic recedes. Does that mean this cleaning products company is no longer a good investment?
That seems unlikely, in my opinion. With a couple of exceptions, the share price has risen relatively steadily for the past 30 of its more than 100 years of existence:
About Clorox
As a result of the Covid-19 pandemic, there are now few investors who haven't become more familiar with Clorox, the bleach company. But bleach is just one of the well-known brands owned by the company, as shown in this slide prepared for the 2021 Consumer Analyst Group of New York (CAGNY) Conference:
It also sells products and technologies to professional customers through its CloroxPro™ and Clorox Healthcare® brands.
The products are grouped into four key segments: Health and Wellness, Household, Lifestyle and International. This slide, also from the CAGNY Conference, shows the broad composition of each segment:
Registered in Delaware and headquartered in Oakland, CA, the company's fiscal years run from the beginning of July to the end of June. It is currently in fiscal 2021.
Competitive advantages
Most Clorox products enjoy a competitive moat; the company says more than 80% of its brands have the largest or second-largest market shares in their categories.
It utilizes what it calls its integrated IGNITE Strategy, designed to accelerate innovation in key areas and especially those where Clorox already has an advantage. In its own words, "It takes the challenges of today and tomorrow — rising consumer expectations, an evolving retail landscape, shifts in costs and competition, and rapidly advancing technology — and makes them a competitive advantage." It also integrates ESG (environmental, social and governance) priorities into its decision-making.
Competition
Consumer products face intense competition, not only from other nationally advertised brands but also from private label brands. The pandemic produced high demand for disinfecting products, leading to strong competition from local producers, other multi-national companies and also many new competitors as the established leaders could not keep up with demand increases.
While the company does not name specific competitors in its 10-K for fiscal 2020, the list of heavy-hitters includes Colgate-Palmolive (CL, Financial) and Proctor & Gamble (PG, Financial).
Risks
Investors should be aware of several risk factors when considering investing in the company, including:
- Customer concentration: Walmart (WMT, Financial) accounted for 25% of net sales over the past two fiscal years. Any break with it would significantly dent Clorox's top and bottom lines.
- While the pandemic has been good for the disinfectant and cleaning areas of its business, it also caused disruption of manufacturing, distribution and supply operations. That led to higher costs. In addition, other factors, such as the potential unavailability of key employees, led the company to rate Covid-19 as a major risk (this information, in the 10-K for 2020, was prepared well before the emergence of variants).
- Product liability is a concern and could lead to loss of reputation and remediation costs. In July 2020, such a case occurred when its subsidiary in Peru had to recall Poett dilutable cleaning products. Insurance is in place, but there are risks due to high deductibles, damages that might exceed insurance coverage and exclusions under a policy's terms.
Recent earnings
The second quarter of fiscal 2021, which ended on Dec. 31, saw more benefits for the company arising out of the pandemic shift. As the company said in the earnings release, "In the second quarter, sales increased 27%, driven by double-digit sales growth in three of four segments due to COVID-19 and related behavioral shifts, including people spending more time at home."
Of this, 26% of the 27% was due to organic growth, while another point came from the recent acquisition of a majority share of its joint venture in Saudi Arabia (all figures in this section are non-GAAP).
The gross margin was up 1.3%, the ninth consecutive quarter in which the metric increased in comparison with the previous year. Clorox attributes the continuing improvement to strong volume growth, cost savings and lower trade promotion spending.
Earnings per diluted share were $2.03 compared to $1.46 in the same quarter last year, and represent an increase of 39%. Net cash provided by operations was 26% higher at $629 million.
Outlook for 2021
Clorox guides for sales growth for this fiscal year (ending June 30th) of 10% to 13%. The forecast is based on strong first-half and flat back-half sales.
Diluted earnings per share are expected to be in the $8.05 to $8.25 range, up from $7.36 in fiscal 2020.
Financial strength
We get mxed messages on the company in terms of financial strength, starting with the cash-debt ratio of 0.23, which is low compared to the rest of the Consumer Packaged Goods industry.
However, it has an interest coverage ratio of 15.64, which is solid and tells us the company has enough operating income to cover its interest expenses more than 15 times over.
The Piotroski F-Score and the Altman Z-Score are both high; on the former, Clorox passes 8 of the 9 criteria for a financially strong company.
While there is certainly more debt than most value investors would like, I think the company is financially strong overall.
Profitability
A company with high profitability would be expected to have robust margins, and Clorox does not disappoint:
The path to profitability begins with revenue growth. Was it able to grow the top line before the pandemic? This chart below shows it has grown steadily over the past 10 years, and analysts expect continued growth:
From an operational perspective, Ebitda tells us how effective the company has been at its business:
This chart of earnings per share (diluted) shows what's left after interest, taxes, depreciation and amortization:
Overall, Clorox has been increasing its revenue for the past decade. Thanks to double-digit margins, an increasing proportion of that revenue is making its way to the bottom line.
Dividend and repurchases
Clorox is an elite dividend payer; after dividend increases every year for the past 42 years, it is a Dividend Aristocrat. That's a company that has upped its dividend for at least 25 consecutive years, is included in the S&P 500, and has a market cap of at least $3 billion. In early 2021, there are only 65 of them.
Some investors are prepared to pay a premium for a Dividend Aristocrat because it lowers the odds that their income will be undermined by inflation.
Turning to share buybacks or repurchases, the company has reduced the number of shares outstanding over the past decade:
Shareholders have benefited directly from 42 year's worth of dividend increases, and by having their earnings divided among fewer shares.
Valuation
As this chart shows, the price has risen more quickly than usual thanks to the demand for disinfectant and cleaning supplies during the pandemic:
However, the GuruFocus Value Chart still gives it a fairly valued rating:
That's backed up the price-earnings ratio of 20.00, which is slightly less than the 10-year median of 20.41 for the Consumer Packaged Goods industry.
The PEG ratio, which is the price-earnings ratio divided by the average five-year Ebitda growth rate, is 4.76. That's well above the fair-value mark for the ratio of 1.00.
The closing price of $189.59 on March 17 was 21% below the high of $239.87 hit last August. As the chart and trendline above show, the price has been rising relatively consistently for the past decade at an average of 12% per year, and the current price is below the trendline.
Broadly speaking, I believe Clorox is fairly valued at this point, although I can envision a case for modest undervaluation or modest overvaluation.
Gurus
Among gurus, there's been a rough balance between buyers and sellers of Clorox stock over the past year:
Seven gurus had positions in the company at the end of 2020, with the three largest holdings belonging to:
- Jim Simons (Trades, Portfolio) of Renaissance Technologies with 1,655,330 shares, representing 1.32% of Clorox's shares outstanding and 0.36% of total assets under management. He reduced his position by 29.39% during the fourth quarter.
- Pioneer Investments (Trades, Portfolio) owned 604,866 shares after adding 15.47% in the fourth quarter.
- Ray Dalio (Trades, Portfolio) of Bridgewater Associates had 130,764 after adding 107.43% to his stake in Q4.
Conclusion
Long before Covid-19 hit and drove up demand for disinfecting and cleaning products, The Clorox Company was a giant in its industry. After the pandemic began, its profile and revenue shot up, but I wouldn't expect a deep drawdown as vaccines and health measures push back against the virus. Even though it carries a hefty debt load, the company is financially robust, profitable and sharing gains with shareholders.
Putting a value on the shares is more of a challenge, with metrics pointing to both undervaluation and overvaluation. Given how close it is to its long-term price average, I'm inclined to call it fairly valued right now, but don't be surprised if you later have to pay a premium, because the share price and dividend together could provide an attractive double-digit return.
Growth investors are most likely to be interested in Clorox stock, followed by income investors who find the total return more compelling than the returns provided by high-yield bonds. Value investors may become interested if there is a further price pullback.
Disclosure: I do not own shares in any of the companies named in this article and do not expect to buy any in the next 72 hours.
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