Patient Clorox Shareholders Are Cleaning Up

Key Points

• Clorox is up nearly 30% since last summer.
• A positive fiscal Q2 performance told us that Clorox’s brands are as relevant as ever.
• The company increased its full-year profit outlook on the strength of higher prices to adjusted EPS of $4.05 to $4.30.
• When the forward dividend yield gets closer to 3.5%, that may be a better opportunity to mop up this stock.

In June 2022, shares of The Clorox Co. NYSE: CLX dipped as low as $120.50, marking a messy 50% plunge from their all-time high. Loyal shareholders of the bleach maker that rode out the decline are now cleaning up.

Clorox is up nearly 30% since last summer, aided by Friday’s 10% surge that was atypical of a defensive name. The high-volume gapper came at the hands of a blowout earnings report — and brought the stock to within a few bucks of its 52-week high. 

No other S&P 500 stock closed out last week with more pizazz. On a day when the broader market took a break from a strong 2023 start, weak results from Apple, Amazon, Google and others allowed Clorox to shine.

Consumer staples have lagged this year’s stunning rebound but we’re not out of the woods yet. A looming recession and an arguably overheated stock market make Clorox one to keep on the radar.

What Did We Learn From Clorox’s Earnings Report?

Clorox’s fiscal Q2 sales inched 1% higher year-over-year thanks to price inflation that overcame decreased volumes. The result was significant because it 1) reversed an 8% sales decline in the prior year quarter and 2) topped the consensus expectation of a slight drop in revenue. 

The company posted adjusted earnings per share (EPS) of $0.98 that represented 48% growth. Wall Street was braced for a sizable drop in earnings so the surprise drove heavy buying activity in a stock that faded ahead of the report.

The profit surge reflected not only better pricing but the success of cost savings initiatives that offset higher commodity, manufacturing and logistics costs. Quarterly cost savings reached a decade high.

The performance told us that Clorox’s brands are as relevant as ever despite inflation and rising rates pressuring households worldwide. Shoppers continued to pay up for trusted cleaning supplies, cat litter and yes, Hidden Valley Ranch dressing. It also confirmed that recent investments in digital capabilities are making operations more efficient and driving product innovation.

On the strength of higher prices, the company increased its full-year profit outlook. It now sees adjusted EPS of $4.05 to $4.30 which at the midpoint would constitute 2% growth compared to its previous forecast of a 2% decline. Management does not, however, foresee additional price hikes — which means there’s more to the guidance boost. 

Clorox revealed that more layoffs are ahead following an initial phase of layoffs in September 2022. The announcement highlights an ongoing cost cutting trend that’s hitting workers at mega cap tech companies and non-cyclical companies alike.

What Do The Charts Say About Clorox?

Friday’s rally was also newsworthy on the technical analysis front. Clorox’s price briefly broke through the 250-day resistance line of $157.43. Although it closed below this level, the high volume nature of the move could foretell a sustained uptrend into the $160’s.

The next long-term resistance level is $166.52, so if the stock can make a convincing move through that, Clorox could be on its way back to the $200’s. 

Indicators linked to the daily chart are sending mixed signals. On one hand, the Clorox’s position well outside the upper Bollinger band points to a near-term correction to reflect normal volatility patterns. At the same time though, the relative strength indication (RSI) is around 60, so we could see the rally extended into this week before profit taking sets in.

Is Clorox Stock a Good Investment?

Although the market was excited about Clorox’s update, most sell-side research firms were not. Three analysts reiterated sell ratings on the stock, two called it a hold and just one a buy. Among the bears, valuation seems to be the biggest concern. 

Although the quarter was undeniably stronger than expected, Clorox now trades at 37x its fiscal 2023 earnings forecast. It trades at 40x trailing earnings compared to the household products industry average of 26x.

Yes, Clorox deserves a premium multiple considering it is outperforming most peers. But a 50% premium seems to be a stretch with price hikes on hold and the company’s balance sheet leverage notoriously high.

There will likely come a better entry point when investors will have a chance to ride a company that suddenly has good momentum. When that time comes, the investment will offer not only exposure to a strong brand portfolio and resilient global consumer but also a nicer income payout. When the forward dividend yield gets closer to 3.5%, this may be a better opportunity to mop up this Dividend Aristocrat.