Clorox (NYSE: CLX) vs Kraft Heinz (NASDAQ: KHC) The Leader or The Laggard?

Consumer Staples Are Where The Money Is

Follow the money, that’s one way to find great investments and when it comes to where the money is flowing the Consumer Staples Sector is it. Not only is the sector buoyed by average “risk-off” sentiment, but it is also being boosted by the very thing causing the rush to risk-off assets, the pandemic.

Oddly enough, a look at a chart comparison of the Consumer Staples ETF (ARCA: XLP) versus the broad-market S&P 500 (ARCA: SPY) shows the sector is only performing in-line with the average stock on a YTD basis. This begs the questions which staples stocks are outperforming and, among those, which are the better buys in today’s market?

Clorox (NYSE: CLX) and Kraft Heinz (NASDAQ: KHC) don’t have a lot in common other than their classification as staples but they share an important relationship among today’s best-positioned consumer staples stocks; one is the market leader and the other the market laggard. Obviously, one has proven it was the better buy at the beginning of the year and both pay good dividends, but which is the better buy today? On the one hand, you have proven market appeal and a strongly trending asset while on the other is a high-yield turnaround-play with the chance of serious multiple expansion.

The Earnings Outlook Is Driving Today's Valuations

It’s no secret that earnings and earnings outlook drives the valuation of stocks. While Kraft has seen an improvement in its YOY results due to the pandemic it hasn’t seen the 500% increase in demand reported by Clorox. Take it from me, I look every week, the shelves at my local store still don’t have Clorox sanitizing products (specifically hand wipes) and we’re four months into the pandemic. The company said earlier this year it would be mid-summer before they caught up and it looks like they are not far off.

In terms of the outlook for growth, Clorox has a commanding lead over Kraft. Kraft is looking at a small YOY increase in calendar 2nd quarter revenue while Clorox should see closer to 30%. As for the year, the results at Kraft will be mixed while those at Clorox firmly in the green. Looking at the analyst’s targets, Clorox will only have to meet consensus for the coming quarter to put it on track to beat the FY consensus while Kraft will have to outperform in stunning fashing.

The difference is that Clorox has had 100% of its analysts raise their targets in the last 90 days while only 85% have raised targets for Kraft. If the analysts are too-cool on Kraft the company could indeed surprise us next month. With a month to go until both companies report, there is plenty of time for the analysts to change their minds.

The Valuation Is Compelling For Kraft Heinz

In terms of value, Clorox is trading more than double the valuation of Kraft and for good measure. The company’s business is outperforming and has better support from analysts. That said, Clorox is trading at 32X this year’s EPS and 30X next year’s which puts it well above every other staple company in the market.

With Kraft trading about 13.6X this year and 13.5X next year’s earnings, it is undervalued compared to most others in the group. Even if Kraft’s value were only to expand in-line with its closest peers were looking at roughly 16X earnings. An expansion to 16X times earnings is equal to $4.68 (using today’s consensus) or 30% upside.

The Dividend, It Could Be The Deciding Factor

The dividends at both companies are safe but there are couple of differences that set them apart, namely the yield and outlook for distribution growth. Clorox is well on the way to becoming a Dividend Aristocrat with 18 years of consecutive increases under its belt. The caveat is that yield is only about 2.0% and likely to not get much higher, at least not while the pandemic is driving sales.

The yield at Kraft Heinz is a much-higher 5.0% but I wouldn’t buy this one expecting a dividend increase soon. Kraft Heinz is still working to deleverage post-merger so free-cash is more likely to be used for that end than upping the dividend. Longer-term, Kraft says it is on track to meet or exceed its deleveraging goals which puts a future dividend increase firmly in the cross-hairs. Regardless, the 5% payout at Kraft is safe enough investors should sleep soundly at night.

If you are looking for a safe place to put new money or dividend growth, Clorox looks like the better choice. If you want higher-yield, multiple-expansion and can stomach a little more risk Kraft Heinz looks like the better choice. In either case, you have pandemically supported, dividend-paying, blue-chip stocks so neither is a bad choice in today’s market. Perhaps the best choice is a blend of both, an equal weighting gives a yield of 3.5%, much better than the Consumer Staples ETF (XLP), and diversification within the sector.