2023-05-12 16:16:52 ET
Summary
- The Clorox Company has weathered the storm. The company has been able to raise prices to offset increasing costs without losing much market share.
- Clorox Company's recent pricing power has been impressive, margins should continue to expand as inflation likely moderates in the back half of the year.
- Most analysts are too negative on Clorox, the stock looks undervalued using several metrics.
The last three years have presented a number of unique challenges to companies across nearly every industry. With Covid shutdowns, labor shortages, prices increasing at historically high levels, and now growing signs of an economic slowdown, businesses have not had easy decisions. Tough times often force difficult choices, and companies have also had to make hard decisions on how much to raise prices without risking alienating consumers.
One company that initially struggled significantly when prices initially began to rise in early 2021 was The Clorox Company ( CLX ). This leading retailer's stock got hit harder than most corporations by rising prices and falling margins.
Clorox's stock is down 18.48% in the last 3 years, while the S&P 500 (SP500) is up over 40% during this same timeframe.
I first wrote about Clorox in April 2022, when I rated the stock as sell. This was primarily because I believed CLX stock was pricing in unrealistic expectations after having record profits during the pandemic, and management had no plan to stop margin compression. Today, I believe Clorox is a buy. The company's recent earnings reports show that management's pricing power has been successful to reverse the recent pressure on overall profitability levels without significant market share loss. The stock also looks undervalued using several metrics.
The main problem that Clorox faced over the last several years has been the impact of rising costs on the company's gross margins. The company was very slow to raise prices even as costs began to increase significantly in early 2021, and the retailer's profitability levels fell significantly over the next 2 years.
Clorox's gross margins averaged between 43% to 46% between 2016 and 2020, but the company saw these margins fall significantly starting in early 2021, with profitability levels falling to 35.8% in late 2022. This is why the company's successful recent and significant price increases that management has put in over the last 2 quarters are so important.
Clorox's third quarter earnings report was impressive. This was the third consecutive quarter the company beat consensus earnings estimates, and management has now shown a clear reversal of the margin compression issues the company had faced for 2 years. Clorox reported third-quarter earnings of $1.51 a share, beating consensus estimates by $.29 a share. Revenues rose 6.1% year-over-year, with price increases offsetting volume declines. Consolidated gross margins increase by 590 basis points year-over-year. The company raised full-year guidance to $4.35-$4.50 a share from the previous forecast of $4.05 a share to $4.30 a share. Management also raised the guidance for margin expansion this year, projecting that gross margins should expand 250 to 300 basis points this year, which was above previous expectations for a 200-basis point expansion.
Clorox has finally been able to use the company's pricing power to reverse the recent margin compression that has hurt the core business, and management was able to accomplish this without losing any significant market share or seeing a significant decline in overall sales volume. The third-quarter was the second consecutive quarter of substantive margin expansion for Clorox after the company saw nearly 2 years of falling profitability levels.
Clorox's core Health and Wellness Segment saw net sales increase by 7% because of a 23% price increase that offset 16-point decline in volume. The company's household division saw a 2% increase in net sales because of a 14% increase in prices that offset a 12% decline in sales volume. The lifestyle division saw a 15% increase in net sales that was also driven by prices increases. International net sales saw organic growth of by 14% with a 21% price increase offsetting a 13% decline in sales volume.
While Clorox did lose some market share because of the company's recent price increases, nearly 9 out of every 10 of the company's customers accepted the company's decision to significantly raise prices across their major divisions. While Clorox did see a double-digit decline in sales in several segments when taking out the impact of price increases, the overwhelming majority of the company's customers chose to stay with the company's strong brands. Management's strong full-year guidance for gross margins and overall earnings also suggests that the company doesn't foresee any significant further market share losses.
This is why CLX stock looks cheap at current valuation levels, given the earnings estimates for the five years. Analysts are projecting Clorox's earnings growth to be nearly 15% per year over the next 5 years, which means the company would be able to nearly double earnings during this time period. If Clorox can hit these earnings targets, the company would trade at 26x projected 2025 earnings estimates, and 23x forecasted 2026 earnings estimates. Clorox's 5-year valuation average is also 28x projected forward GAAP earnings, and the company has consistently beat recent analyst expectations.
The Clorox Company has a largely recession-resistant business model, as was seen again during most of the pandemic. Rising prices are what has hurt the company over the last several years. Clorox management was unwilling to significantly raise prices when costs initially began to increase in early 2021, but the company has clearly now made a firm commitment to expanding the company's margins, and that is working. While The Clorox Company had struggled more than most companies over the last several years in a difficult operating environment, management now has a clear plan that is succeeding.
For further details see:
Clorox: Management's Plan Is Working, Now A Good Time To Buy (Rating Upgrade)