2024-01-03 01:44:42 ET
Summary
- Clorox rated Hold, agreeing with the consensus from analysts, Wall Street, and the quant system today.
- A cyber attack in 2023 had major impact on logistics, earnings and revenue, and the company is still recovering.
- Low equity and earnings declines are driving up valuation metrics.
- A risk factor to consider is recession or economic slowdown risk, as it is a consumer products company.
- Dividend growth is proven and steady, and currently $1.20/share per quarter.
Stock & Industry Snapshot
With holiday seasonal shopping and travel behind us for now at least, today's research note is covering a well-established household name in consumer products, and one that I would say is in demand all year long, with every trip to the local supermarket.
A few quick facts about The Clorox Company ( CLX ) are that it is the parent company behind household products like Clorox wipes, Liquid-Plumr, Pine-Sol, Fresh Step cat litter, Burt's Bees lip balm, and many more.
It traces its roots back to 1913, its products are sold in +100 countries, it's based in California and trades its stock on the NYSE.
I should mention that based on key market data the consumer staples sector has not performed as well as several other sectors. For instance, its YTD and 1-year performance was negative, and its 3-year performance is much lower than sectors like financials who have seen a period of bullishness lately.
This is relevant because the market's sentiment about a sector may or may not have an impact on an individual stock in that sector, so something to think about when considering Clorox for my portfolio.
consumer staples sector (Seeking Alpha)
Scoring Matrix
We use a 9-point scoring method that looks at this stock holistically and assigns a total rating score, using a score matrix.
Today's Rating
Based on the score total in the score matrix , this stock is getting a rating of hold.
This is my first time covering this stock, and it appears my neutral sentiment is aligned with the entire consensus from analysts and the quant system who all think this stock is in hold territory:
Clorox - rating consensus (Seeking Alpha)
Dividend Income Growth
The following is the dividend growth chart:
What it tells us if we are dividend-income investors and care about this metric is that this stock had a steadily growing dividend that went from $2.90/share/annually in 2014 to $4.76/share/annually in 2023, a 64% growth over 10 years.
Non-dividend investors should also care about this as it paints a picture of a company with enough free cash each year to be able to return some back to shareholders. It can be taken as a sign of financial strength and stability but also growth.
As for future outlook, we already can see a quarterly dividend of $1.20/share was declared for 2024 (estimated $4.80/annual) so it is already growing further. However, further dividend hikes are uncertain considering there has been a YoY earnings decline on the income statement and at least one of the last few quarters posted a net loss.
From the evidence, I would call it a modest buy in this category, on the basis of proven prior and current dividend growth but cautious due to earnings headwinds, since that could impact future dividend hikes if earnings do not improve.
Dividend Yield vs Peers
Next, we'll briefly look at the following chart which compares the trailing dividend yield of Clorox with three peers in its sector. It is handy tool I use often from Seeking Alpha.
This peer group was chosen for all having a very large market penetration in supermarkets, among various household goods / consumer staples. What we can gather from this data is that Clorox leads the pack with a dividend yield of 3.34% (forward yield 3.37%).
Procter & Gamble ( PG ), Colgate-Palmolive ( CL ), and Church & Dwight ( CHD ) all lagged behind.
Considering feedback from some comments lately, I am aware that investors are increasingly having to choose between parking their capital in high-yielding bonds or bank CDs as opposed to low-yielding dividend stocks, so yield is certainly a relevant topic.
I think that a +3% yield in this sector whose average is around 2.6% is a good reason to call this stock a buy right now, but not a strong buy since there are other sectors like insurance stocks where some stocks are beyond +5% yield.
Revenue Growth
Now comes the part where we talk about top-line growth, a topic I think is on the mind of many an analyst or investor. For financial metrics we'll be using the most recent FY24 Q1 figures released on Nov. 1st, as the next earnings are not due until Feb. 1st which is a month away.
From the income statement , we can see that revenue fell to $1.38B in Q3, vs $1.74B in Sept 2022, declining 21% on a YoY basis.
From working seasonal jobs in stores many decades ago, as some of my readers may have too, I remember the importance of pushing product out the door so new product from the warehouse can be stocked. This requires lots of sales , and ultimately consumer demand in an environment where Clorox is competing with store-brands and others.
Important to note is that the company was targeted in a cyber-attack last year, which had a major business impact. Here is what CFO Kevin Jacobsen said in his remarks :
the impact of wide-scale operational disruptions from the cyberattack resulted in sales and profit declining in the first quarter.
First-quarter net sales declined 20% , driven by lower shipments from the depletion of customer inventory as well as lost consumption resulting from the wide-scale disruption caused by the cyberattack.
The market was already aware of the potential impact of this attack even before the quarterly earnings came out, as it made headlines in media including a Reuters story.
As far as forward-looking sentiment, mine is neutral on this company's revenue since in its own words from the quarterly earnings release it will take time to fully recover from the attack but besides that there are potential recessionary headwinds and after all they are a consumer products company:
We continue to assume a volatile and challenging operating environment, with inflation impacting our consumers and input costs. We also continue to assume a mild U.S. recession in the back half of our fiscal year, which we expect will put additional pressures on our consumers and categories.
I am compelled to call this a hold rather than a sell or buy, because a lot of the revenue negative impact came from a one-time event (a cyber attack) but at the same time it seems like it created a larger logistical issue for the company to resolve, while also facing an inflationary economy too as an added pain point.
Earnings Growth
Also from the income statement , we can see that earnings also fell to $22MM in fiscal Q1, vs $85MM in Sept 2022, a YoY decline of 74%.
What we can learn from the income statement is that items like interest expenses on debt actually saw a YoY decline by around $1MM, and total operating expenses grew barely by $1MM.
The key impact to earnings it seems was from the top-line revenue impact we already talked about.
Looking forward to full-year fiscal 2024 earnings per share, the company has already lowered its expectations, according to management remarks :
fiscal year diluted EPS is now expected to be between $2.10 and $2.60, or an increase of 75% to 117%, respectively. This compares to previous expectations between $4.65 and $4.95.
In this category, I call it a hold , since the situation is largely impacted by the one-time cyber attack hitting revenues hard and therefore earnings too, rather than earnings being impacted by a drastic increase in costs. I think by now the market would have already priced in this risk of a lower EPS since it was announced in early November, so by now I don't expect the market to push the stock down drastically on this issue alone.
Equity Positive Growth
In looking for companies to add to a portfolio, I look for those with a history of positive equity but also growth in equity when possible.
From the balance sheet , we see that Clorox has seen an equity decline to $131MM, vs $496MM in Sept 2022, a roughly 73% YoY decline in book value.
Long-term debt, which I think is already high at $2.47B, was practically flat on a YoY basis. It appears current liabilities saw a YoY increase and had an impact on equity, while total assets also declined.
I think this scenario remains sustainable as long-term debt is only around 41% of total assets, and the company has yet to drop into negative equity.
It is also no small shop, with $5.99B in total assets and $518MM in total cash.
For those reasons, I call it a hold in this category rather than a sell.
Share Price vs Moving Average
Using the yChart, we can see the most recent price of $144.85 and the 200-day SMA of $149.22:
As I mentioned earlier, and confirmed by the chart, is that the "shock" of the cyber attack seems to have already been priced in during that autumn price dip you see. Since then a rebound has happened, a good sign that momentum is returning.
The price is hovering around 3% below the moving average , but does this automatically make it a value buy?
In this case, I am looking at the price along with the revenue/earnings/equity growth, all of which declined by double-digits. In addition, forward EPS outlook has been lowered by the company for FY24.
I think the real "opportunity" to snatch up shares in Clorox was during the autumn price dip below $120.
I am going to call it a hold at the current price, since it does not make a great buy (only +3% dividend yield along with declines in earnings), however it is still too cheap to sell. It may take another quarter or two of solid earnings results and then ride the price up above the moving average to achieve a capital gain once the market restores faith in this company and brand.
I don't think a brand of this caliber is going away anytime soon, cyber attack or not.
Valuation: Price-to-Earnings
Valuation data tells us that the forward P/E ratio has climbed to 37.70, and also is +93% above the sector average, an average hovering closer to 19x earnings.
The question what is driving this high multiple is clear from the prior data I discussed: a double-digit earnings decline while the price has recovered from its autumn dip. This is causing a rift between price and earnings, I think.
A much better valuation scenario I would pick is its peer Procter & Gamble , who has a forward P/E of just 22.80, while its earnings saw a YoY growth yet the share price is still hovering below its 200 day moving average:
Procter & Gamble chart (Seeking Alpha yCharts)
From the evidence, PG is a better valuation and I would go for that, and in this case would call Clorox a sell at this elevated valuation as earnings are not keeping up with the share price recovery.
Valuation: Price-to-Book Value
Also from valuation data, we can learn that the forward P/B ratio is showing at 188x book value, over 6,000% higher than its sector average.
Clorox - PB ratio (Seeking Alpha)
Driving this high multiple is clearly the fact that the book value is low to begin with at just $131MM for a company of this stature, along with a double-digit equity decline in the last fiscal quarter while the share price although it is trading below average it made a sharp recovery from autumn lows.
I will agree with Seeking Alpha this time that this valuation deserves an "F" grade for being 188x book value, and I will call this stock a sell.
Equity growth will have a long way to go to catch up to the improving share price especially if it continues to improve sometime in 2024 after the cyber attack issues subside. I believe this particular metric will remain overvalued for some time, therefore.
Now, if the equity had grown by double digits in the last quarter and the share price had grown too, I would be more inclined to say hold or buy, rather than buying into a company with declining equity that is low to begin with.
Do share your thoughts in the comments section on this specific valuation, so we can continue this discussion!
Risk Analysis
This being a consumer products company, and the potential risk impact and probability of a recession was already mentioned by the company themselves, let's see what other sources have to say on this risk.
A few days ago, an article in Business Insider mentioned potential for a mild recession:
The Federal Reserve will likely bring interest rates below 3% by next December, as a pullback in consumer spending will trigger a mild recession in 2024, UBS chief US economist Jonathan Pingle told CNBC on Friday.
Also in December, another article in Forbes magazine pointed more to a slowdown coming in 2024 rather than a full-blown recession:
Despite the generally favorable leading indicators, the sharp increase in interest rates (and reduction of the money supply) that we have had over the last two years should still trigger an economic slowdown. Growth will be positive but lower than the long-run average. Unemployment will probably rise by a little but go not terribly high.
My sentiment is that both scenarios, recession or slowdown, could impact a company selling consumer goods. However, this company sells many essentials that thousands of households simply need to get each month, or week. Think about kitty litter, bleach, wipes, and so on... these are consumables that have to be replaced. They also have competition from store brands and other name-brands as well, since Clorox is not the only brand in town.
Collectively considering all of these factors, I am compelled to say hold on this risk factor, as I am middle-of-the-road when it comes to this risk, due to the different factors tugging at each other.
Quick Summary
Holistically, the case for a hold has been made here, despite some individual metrics pointing to a buy or sell.
Negatives remain the double-digit revenue, earnings, and equity declines, although a lot of that was impacted by the one-time cyber attack and its aftermath.
Positives are the brand strength of this company, share price recovery, proven past dividend growth, and declining operating costs.
My portfolio strategy here would be to continue holding this one for the quarterly dividend income of $1.20/share, and waiting on a capital gain once their earnings recovery materializes and the market gains more confidence in this sector overall, pushing the stock up past its 200-day average again which could set it up for a sell.
For further details see:
Clorox: Not Wiped Out By Cyber Attack, Earnings And Revenue Need Cleaning Up