Insane Demand Will Drive Clorox Higher

Clorox Is The #1 Bet For Pandemic-Driven Gains

Clorox (CLX) reported earnings for the first quarter last week and gave what I called then a “goldilocks report”. The headline figures were above consensus, they showed growth from the previous year, and were backed up by internal data that points to robust results this year.

The key takeaway from the report is that Clorox expects to see demand remain strong for the foreseeable future. Because of that, the company raised guidance to a range of 200 basis points above the prior consensus. Today’s news only reinforces the outlook and suggests that it may even be too low.

What Did Clorox Say That Was So Awesome?

Representatives of the Clorox brand told the New York Times the company did not expect to catch up with demand for many of its products until mid-summer. This means the company is expecting to operate at full-capacity, or as full as it can, until meeting demand and even then production levels are expected to stay high. Clorox, like its closest competitor Lysol, is seeing its products fly off of shelves because of pandemic-driven demand. If Clorox can’t kill this thing then we really are in trouble.

In an interview shortly after the Q1 earnings release, Clorox CEO Bonner Dorer said company output was up 40% over the prior year quarter. In some cases, product demand surged 500% to levels no supply chain can keep up with. Basically, there is so much demand for Clorox products the company can expect to operate at max output for the duration of the pandemic and possibly longer.

What makes the news so much more exciting is Clorox plans to increase advertising. Already a household name, Clorox is not sitting on its laurels but taking advantage of market momentum to increase its reach and product-awareness. Looking forward, the company is expected to grow EPS by over 8% this year and carry that momentum into next.

Highly Valued, But Value Is Where You Find It

When comparing Clorox to the other consumer staples products you might think it overvalued. Trading at 29X forward earnings it is valued at near-double the rate of most other staples (XLY) companies. The difference is that Clorox is the best-in-breed staples company for this situation as it sells the world’s leading brand of household disinfectant, among other high-demand product lines. The pantry-loading craze will subside long before folks stop using Clorox. I know my family keeps a jar of wipes in all the cars, and several places in the house, so we can disinfect EVERYTHING.

When you compare Clorox to another best-in-breed company, a healthcare company I’ve described as the leading staple-oriented medical products company, the valuation looks much more reasonable. Abbot Laboratories (ABT) is trading at a higher 32X forward earnings (compared to 19X for competitor Johnson&Johnson (JNJ)) which suggests Clorox may still see multiple expansion as well as earnings and dividend-driven gains.

The dividend, it’s not what I would call a high-yield but at 2.0% (at today’s prices) it is in-line with the broad market average and well above the ten-year Treasury. What makes the dividend so nice is the company’s growth outlook, the dividends health (no cuts happening here, unlike other sectors and industries I could mention), and the outlook for growth. With 18 years of increase under its belt, Clorox is a proven payer well on the way to Aristocrat status.

The Technical Outlook: Bullish

The technical outlook for Clorox is bullish. The stock has been supported by a long-term uptrend for many years and that trend accelerated over the past three months. The stock is now heading up to retest the recently set all-time high and the indicators are in support. Both MACD and stochastic are bullish and suggest higher prices are on the way. Because MACD is currently rising and the stochastic is still low in its range I think this rally has plenty of room to run. A test of the all-time could result in a break-out and spark a whole new bull market.