Over the past month, Clorox's (CLX) stock is up 16.8%. Including its healthy 3.22% dividend yield, the maker of Clorox, Pine-Sol, Brita, Glad, Burt’s Bees, and RenewLife has a total return of 22%. That puts it in the top 10 S&P 500 companies.
There’s no doubt it’s on a roll. The question is whether it can stay on a roll. Over the past 3-year, 5-year, 10-year, and 15-year periods, it’s been outclassed mainly by its industry peers.
And most certainly, it’s gotten crushed by the entire U.S. market, but as they say, past performance does not guarantee future results. This could be the beginning of a huge run. The last big run CLX had was from January 2001 through July 2020. It gained almost 600%, not including dividends.
There’s no reason it can’t happen again. Here’s why.
Clorox’s Valuation: 2001 Through July 2020
In fiscal 2000 (June 30 year-end), Clorox’s top-line revenue was $3.99 billion, while its net income was $394.0 million, a net margin of 9.9%. Fast forward to fiscal 2020. Its revenues were $6.72 billion with a 14.0% net margin, 410 basis points higher.
On June 30, 2020, CLX was valued at $27.2 billion [126.2 million shares * $215.30]. On June 30, 2000, CLX’s valuation was $10.6 billion [235.5 million shares * $44.81], slightly more than one-third of its value 20 years later. However, its compound annual growth rate over those 20 years was less than 5%.
The one beautiful thing about this comparison is that it reduced its share count by almost half through its share repurchase program. In its 2021 fiscal year, it repurchased 4.76 million shares for $905.0 million, an average price of $190.21.
How’s it done through the first nine months of fiscal 2022?
It repurchased just $25 million of its stock, down considerably from $605 million in the same period last year. It’s easy, in hindsight, to take down Clorox management and the board for a terrible job buying back its stock. Still, capital allocation is the CEO’s most important job.
On the positive front, the nearly 50% reduction in share count means it can pay out more dividends per share with the same amount or less money. So, from that perspective, Clorox has delivered for shareholders.
Today’s Valuation
As I write this, Clorox stock is trading at 2.62x sales, less than its five-year average and its lowest multiple since 2014. From this angle, it’s more than fairly valued. However, over the trailing 12 months ended March 31, its free cash flow (FCF) was $560 million. Based on a market cap of $18.2 billion, its FCF yield is 3.1%. I consider anything below 4% to be relatively expensive.
Seven of the 19 analysts covering Clorox have a “sell” rating, while only two think it’s a “buy.” The median target price is $134.50, more than $13 less than its current share price. The enthusiasm for Clorox isn’t there despite the defensive nature of its business.
In its prepared remarks for its Q3 2022 conference call, the company’s outlook for the final quarter of the fiscal year wasn’t very inspiring. Net sales will fall 1-4% over 2021; its gross margin will be 800 basis points less due to a more significant impact from inflation.
Its adjusted earnings per share will be between $4.05 and $4.30. In 2021, they were $7.25, down 2% from $7.36 in fiscal 2020. Looking at its Lifestyle business through the first nine months of 2022, it is the segment delivering for shareholders. Its operating margin is $239 million, or 24.9% of sales. It generated almost the same pre-tax income from less than half the sales. The segment's brands include Burt’s Bees, Hidden Valley, and Brita.
Management needs to find more brands for its Lifestyle segment. That’s where the real profits are to be had.
There Are Better Buys
Over the past five years, Church & Dwight’s (CHD) stock has appreciated by 75.08%, almost 15 percentage points greater than Procter & Gamble's (PG) and 6x Clorox’s share price.
Church & Dwight’s products might not be as glamorous -- Trojan condoms, OxiClean fabric care, Arm & Hammer kitty litter, and Nair body cream -- but they get the job done.
Over the past month, CHD is up 8.5%, about half Clorox’s return, but in positive territory. If any stock goes on a big run, it will be Church & Dwight.
While analysts are also hesitant about betting on Church & Dwight, its median target price is $99.00, 6.2% higher than where it’s currently trading and 16% higher than CLX on a relative basis.
I don’t think Clorox has the stuff to keep moving higher. Let’s call it a hunch.
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