Shares of venerable household products company Clorox (CLX, Financial) performed unexpectedly well from 2014 through about mid-2016. They finally topped out last July at $140.47. Clorox has more or less only marked time since. Clorox was quoted at $138 on March 21.
Investors appear to like the recession-proof nature of the business. They’ve also been enamored of the yield, which provided an average of 3.21% since the start of 2010. Oh, the power of ZIRP.
I am not surprised that Clorox couldn’t even hold 2016’s level, though. At over $140 (red-starred below) the slow-growth company was selling for a heady 28.6x forward earnings. The 2.21% yield in effect at the peak was subpar compared with Clorox’s normal payout.
Value-oriented traders were able to buy into Clorox at much more favorable valuations (green-starred) during each of the past seven years.
Anyone lucky enough to be long Clorox should consider locking in gains. At $138 the shares fetched a formidable 26 times 2017’s estimated EPS of $5.30. The dividend yield lagged the stock’s historical average by almost 28%.
Why is recognizing overvaluation important for investors? Holders that perceived 2016’s overvaluation could have avoided the last eight months’ decline. Knowing Clorox is still pricey might also allow Clorox shareholders to sidestep future poor returns.
Value Line research offers three- to five-year projected price ranges based on expected EPS multiplied by what they feel is a sustainable and predictable price-earnings (P/E) multiple for the stock in question. Its researchers expect Clorox’s profits to expand to $7.05 per share. They also see Clorox’s multiple contracting from today’s extended valuation.
That combination implies disappointing total returns lie ahead.
Applying a normalized P/E to this year’s earnings would only justify about $104 on Dec. 31, almost 25% below where Clorox sat this week. Could that be too harsh? Let’s see what others figure Clorox is worth.
Morningstar agrees that Clorox is trading too high.
It carries Clorox with a 2-star, out of 5, sell rating. Morningstar’s perhaps generous, fair value estimate is $119. Clorox has only appeared this overpriced once before. That was right as it was topping out in 2016. Why hold from $138 for that?
Standard and Poor's analysts labeled Clorox as a "hold" from the mid-$137s. That was somewhat enigmatic as S&P’s 12-month target price was listed as $127. Things looked even worse if you scrolled further down to the computer-generated, quantitative evaluation.
Clorox registered S&P’s absolute lowest rating (1-) in terms of price to fair value. Its $91.50 estimate of present-day value isn’t really crazy. That number represents 18.7x trailing EPS, a very credible multiple based on Clorox’s historical trading record.
Perhaps the real question should be, “Why does Clorox’s single-digit growth merit even that high a P/E?”
The view from the bleachers is looking pretty bleak.
If you own Clorox, consider selling. If you were thinking about buying Clorox, think again.
Disclosure: No positions in Clorox shares or options.
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