2023-07-20 00:29:33 ET
Summary
- Clorox's near-term results have been driven by price hikes, offsetting volume declines due to post-pandemic demand normalization. This tailwind, however, is receding with moderating inflation.
- Well placed to benefit from growth opportunities in water filtration systems as well as growth drivers in international markets.
- Looks pricey with a forward P/E that is higher than its historical average and higher than most rivals.
American household cleaning products giant Clorox’s ( CLX ) near term results over the past few quarters were largely driven by price, which in some quarters more than offset volume declines as a result of post-pandemic demand normalization trends. Longer term, growth opportunities in water filtration and international markets could support management’s 3%-5% net sales growth target but valuation is pricey.
Stable growth prospects in home market
In the U.S. Clorox’s biggest market (accounting for 84% of revenues), much of Clorox’s products are well penetrated and are essentially commodity products with extremely stiff competition, however water filtration is a bright spot.
Health & Wellness
Clorox’s biggest business segment, Health & Wellness (which accounts for more than a third of revenues) consists of everyday cleaning products such as its namesake bleach brand Clorox, as well as other cleaning products such as Pine Sol and Liquid Plumr. Volumes have been declining over the past few quarters due to normalizing demand post-pandemic, however overall sales performance has been held up by price hikes. For the first nine months of FY2023, the segment’s top-line barely moved, as price hikes were offset by volume drops.
Clorox 10-Q, Q3 2023
Longer term growth prospects appear limited for Clorox’s biggest business. Cleaning products is a slow growth market in the U.S. (research reports project a low-single digit growth rate over the coming years). Opportunities for organic market share gains appear challenging as well considering Clorox’s flagship product - bleach - is already the market leader in the U.S. with a 65% market share in America’s bleach market. Market share gains may be possible in the general-purpose cleaning products market (Clorox and Pine Sol together account for more than a fifth of the U.S. market) but the market has long been highly competitive with giants like Procter & Gamble ( PG ) and Reckitt Benckiser ( RBGPF ) having ample resources to defend market share.
Household
Clorox’s second largest business segment, Household, (which accounts for about a quarter of revenues) comprises products such as bags and wraps, grilling products (such as grills and charcoal which the company dominates with a 50% market share), and cat litter. The segment’s performance has been generally stable over the past few quarters (segment sales dropped 4% YoY in Q1 2023, rose 9% YoY in Q2 2023, and rose 2% YoY in Q3 2023) partly benefiting from good performance from cat litter sales which rose in all three quarters helping offset weakness in grilling sales which have decreased all three quarters. For the first nine months FY2023, Household segment sales rose 2.2% YoY.
Looking ahead, prospects are cloudy. Cat litter is the segment’s bright spot at the moment and market prospects are generally positive with reports projecting a mid-single digit growth rate in the U.S. Clorox competes in this space with its Fresh Step and Scoop Away brands. However, the market is competitive and competitive pressures are increasing, notably from Nestle ( NSRGY ) who with their unrivaled global distribution network (in contrast to Clorox which is largely U.S.-focused) arguably enjoys a cost advantage Clorox may not be able to match. In addition Nestle arguably has advantages in the form of product and marketing synergies (Nestle’s Purina pet care brand spans a broad variety of products including pet food as well as cat litter) as well as financial resources (Purina is a $19 billion business compared with Clorox whose entire Household business segment generates less than $2 billion ). Clorox will have to compete on the innovation front, however at this stage there is little indication that Clorox’s products outdo Nestle or rivals in any particular area and there is little reason to see this changing in the foreseeable future; Nestle recently announced plans to invest billions into R&D, and claimed to be the biggest R&D spenders in the pet care industry.
Lifestyle
Clorox’s third biggest segment, Lifestyle, consists of food, personal care, and water filtration products. For the first three quarters of FY2023, the segment’s revenues rose 4.5% YoY and prospects appear positive driven by water filtration products which are enjoying robust demand in the U.S. on the back of positive trends notably consumer concerns over water quality. A survey by the Water Quality Association found that 30% of residential water utility customers were concerned about water quality, which partly explains America’s booming multi-billion dollar bottled water industry. Sustainability concerns however present a headwind to bottled water and a tailwind for water filtration systems and growing awareness that bottled water is sometimes merely filtered water presents a further growth driver to the industry. Research reports project growth in the high single digits over the coming years, a potential boon for Clorox whose Brita water filter business is a market leader in the U.S.
Good prospects in international markets
Clorox’s international business declined during the first nine months of FY2023, largely driven by currency headwinds. Organic sales, which exclude foreign currency impacts, were up strongly in all three quarters (up 8%, 9%, and 14% respectively in Q1, Q2, and Q3 of FY2023). Looking ahead, international markets could enjoy positive growth particularly from markets such as India and Southeast Asia where demand for Clorox’s key products such as bleach and all-purpose cleaners are growing faster than in the U.S. (the home cleaning products market in India for instance, where Clorox has a presence, is projected to grow at a scorching 20% growth rate over the coming years). Although international remains a relatively small revenue generator, given high growth prospects in large markets like India, they could contribute meaningfully to overall growth.
Conclusion
Clorox has an analyst consensus rating of sell.
WSJ
Clorox’s IGNITE strategy which aims to grow net sales by 3%-5% , could be feasible supported by solid growth prospects in businesses such as water filtration systems as well as opportunities in international markets like India. Potential margin expansion from cost saving initiatives under their IGNITE strategy which aims to grow EBIT margin by 25-50 basis points could further support earnings growth and therefore support the dividend aristocrat’s over 40-year dividend growth track record.
However, Clorox’s current forward P/E of 33 is difficult to justify for a company growing in the low-to-mid single digits. Moreover, it is higher than their five year average of 28.5, and higher than rivals like Procter & Gamble (owner of cleaning products brand Microban) which trades at a forward P/E of 25 . Reckitt Benckiser (owner of cleaning brand Lysol which directly competes with Clorox’s Pine Sol cleaning brand) trades at a TTM P/E of 19 . Nestle, owner of pet care brand Purina, trades at a forward P/E of 20 . CLX stock could be viewed as a hold.
For further details see:
Clorox: Stable Growth Prospects But Pricey