Clorox Stock: Far From Clean (NYSE:CLX)

Clorox (CLX) has with regular intervals appeared on the 52-week low list. The company was one of the poster child of the market just after the outbreak of the pandemic. In fact, shares rallied 50%, up from $160 ahead of the pandemic to $240 in the time frame of just a few months, a big move for such a defensive consumer staple company.

What happened has been continued pullbacks in the share price despite a two-year-long period of the pandemic as, in fact, shares have fallen below the pre-pandemic levels, currently trading at just $137 per share.

Where Do We Come From?

A household name like Clorox hardly requires an introduction and hence I am going back to May 2021, when I concluded that Clorox looked a little prettier after a rocky period.

Clorox is, of course, a household name which generated some $6 billion in sales (pre-pandemic) from cleaning products, households products, lifestyle products as well as an international business. With the company mostly operating leading brands (either number one or two), the company is regarded as a leader in the markets in which it operates. In fact, the company generated $6.2 billion in sales in 2019 on which it posted earnings of $820 million, or $6.32 per share.

Wipes, trash bags and other cleaning products were obviously in great demand since the outbreak of the pandemic and hence spectacular demand for the products was seen since the outbreak. The third quarter of the fiscal year 2020, coinciding with the first quarter of the calendar year 2020, revealed a 15% increase in sales with the pandemic only impacting the results towards the end of the quarter, as fourth quarter sales rose 22%. This made that 2022 sales were up 8% to $6.7 billion, with earnings up 15% to $939 million, equal to $7.36 per share.

The outlook for 2021 was a bit uncertain as the pandemic only boosted the results toward the end of the year but to a big extent. With revenues up 27% in the first two quarters of 2021, the potential was certainly there, yet earnings were under pressure amidst margins pressure, due to higher commodity costs and shipping costs, actually resulting in pressure on earnings. Hence, the company revised the full year sales guidance down to $7.5 billion, yet earnings were only seen at $7.55 per share in 2022.

With shares back to $180, I noted that valuations were still demanding at 24 times earnings, even as there was a pandemic element to the earnings. Net debt of $2.0 billion resulted in very reasonable leverage multiples with net earnings posted at $950 million. Despite a big pullback seen from $240 to $180, the valuation was still too demanding, as I concluded to start to initiate around the $160 mark.

What Happened?

Shares of Clorox actually have trading range bound between $160 and $180 for the remainder of 2021. In the summer, it became apparent that the company ended the year on a softer note with fourth quarter sales down 9% as full year revenues fell short of the guidance at $7.3 billion, as adjusted earnings actually fell to $7.25 per share while the company previously guided for growth.

Worrisome is the 2022 guidance with sales seen down between 2% and 6%, as the real concern is an estimated 300-400 basis points in gross margin compression, with adjusted earnings seen at a midpoint of just $5.55 per share, actually below the 2019 results! Given this, I am actually surprised to see shares trade at $160 per share, as this results in a 30 times earnings multiple, as the 2022 outlook is worse than it was in 2021, actually worse than my estimate earlier that year.

The first quarter results were soft, but in line with expectations as the company maintained expectations, but shares fell to $140 in February 2022 as the company announced softer second quarter results. Second quarter sales were down 8%, but adjusted earnings per share fell two-thirds amidst huge inflation pressures and softer demand for its products. This triggered a major cut in the full year outlook, with sales now seen down 1-4% which is better than previously guided for on the back of price hikes, yet adjusted earnings are only seen at $4.25-$4.50 per share now!

Net debt comes in at $2.7 billion which results in a very reasonable leverage ratio in normal years, with EBITDA seen around $1.4 billion in 2021. That, however, is not attainable this year, resulting in rapidly increasing leverage ratios. In fact, it is not just reduced earnings power that makes this leverage increase, as the quarterly dividend of $1.16 per share actually exceeds the current earnings power.

Hence, despite the big pullback in the share price, the company still trades at 30 times earnings, in part because earnings have been revised 40% lower from the 2021 results and are down 50% from peak earnings during the pandemic. This is quite severe, by all means.

Concluding Remark

Right here, the dividend yield starts to look compelling, but the payout ratio actually exceeds 100% and leverage is higher, but not a real concern. The issue is that profitability is not representative here, as a normal profit rate likely comes in closer to $6 per share, and if that is realised, the resulting 23 times earnings multiple looks a lot better already.

The issue, however, is that current inflation is unprecedented, and while the company claims that it has tackled this well in the past, I have concerns here given the extent of inflation, as well as the fact that the business might see more competition from private label solutions, as well as ESG headwinds, with many of its products not being great for the environment (quite an understatement).

Amidst all of this, appeal is certainly increasing, but the current performance is outright challenging, to put it nicely. Hence, this is likely a great level to add to any dividend portfolio here, with Clorox being a true dividend aristocrat, but I fail to have great conviction in initiating a big position here.