Stock Analysis & Ideas

Clean Up Your Defensive Holdings with Clorox Stock

Story Highlights

When macro-level economic headwinds persist, sometimes it’s best to stick to solid, familiar brand names in your portfolio. Clorox fits the bill perfectly with a reliable yield and a realistic fiscal outlook, which could lead to a positive earnings surprise.

California-based Clorox (CLX) provides household cleaning products, including Clorox bleach, Pine-Sol, Liquid-Plumr, Tilex, and Formula 409. I am bullish on the stock.

There’s comfort in familiarity, and consumers often turn to well-known brand names like Clorox when they shop for essential home goods. Believe it or not, 9 out of 10 U.S. households have Clorox products, and more than 80% of Clorox’s portfolio consists of number-one or number-two share brands.

This isn’t to suggest that Clorox doesn’t have its share of challenges. Indeed, the company acknowledges supply-chain disruptions, “Commodities, logistics & labor inflation,” and “Higher expenses in order to meet spikes in
demand & greater volatility” as headwinds. These are commonly cited issues in the consumer-product market, and Clorox will have to demonstrate its ability to overcome these challenges.

That’s easier said than done, of course. Nonetheless, Clorox is able to deliver decent results while continuing to reward its loyal shareholders. At the same time, Clorox’s muted expectations could present a setup for a future earnings surprise.

On TipRanks, CLX scores a 1 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.

Momentum is Strong

In the wake of the onset of COVID-19, cleaning products suddenly became red-hot commodities. Bleach was in high demand as families sought to reduce infection risks in their homes. All of this gave an unexpected boost to Clorox’s business for a while.

Apparently, it also boosted the Clorox share price for a few months. In August of 2020, the stock jumped into the $230s, seemingly on a rocket ride toward $250 and beyond.

Fast-forward to mid-2022, and we can see that the rally in Clorox stock wasn’t destined to last forever. Not long ago, the shares traded in the $130s, representing a significant discount. Cushioning the blow for Clorox’s long-term investors, however, is the fact that the company pays a nice dividend.

Currently, Clorox offers a forward annual dividend yield of 3.34%. Thus, long-term shareholders can leverage the magic of compounding if they choose to reinvest the dividends into more Clorox stock shares. In any case, income-focused investors should consider the stock as there doesn’t seem to be any imminent signs of major dividend cuts from Clorox.

On the other hand, some folks might be concerned about the demand for household cleaning products waning now that the initial COVID-19 cleaning frenzy has all but diminished. There’s also concern about inflation, which has put a damper on consumer behavior, in general.

However, in a shareholder letter for Clorox’s third quarter of FY2022, CEO Lisa Rendle reassured the company’s stakeholders that “Category momentum is strong compared to pre-pandemic levels, bolstered by consumer-trend tailwinds, with demand remaining robust in the third quarter.” In other words, people are still buying household cleaning products despite high inflation and the waning of the COVID-19 cleaning trends.

No Signs of Stress

Meanwhile, in a blog post from Clorox, Rendle helped to quell investors’ concerns about supply-chain disruptions. She reported that Clorox is “Aggressively managing all aspects of our cost structure, including making progress in optimizing our supply chain as we’ve transitioned external manufacturing from a large group of co-manufacturers to a few strategic suppliers.”

Along with that, in Clorox’s prepared management remarks, Rendle has acknowledged that consumers are under pressure due to inflation but still asserted that “demand remains resilient, and they have responded well to our pricing actions.” Perhaps most importantly, the CEO declared that Clorox isn’t “seeing signs of stress in our categories, which have remained healthy in the third quarter.”

Do the numbers support a bullish stance on Clorox stock now? In Q3 of FY2022, Clorox increased its net sales 2% year-over-year to $1.8 billion. This was roughly in-line with what analysts on Wall Street had expected. So far, everything seems fine.

That same quarter, Clorox posted adjusted earnings of $1.31 per share. On a year-over-year basis, this unfortunately represents a decrease of 19%. Still, the result exceeded the analysts’ consensus estimate of 97 cents per share. Again, Clorox seems to be doing respectably well.

Looking ahead to full-year fiscal 2022, Clorox has muted expectations. Specifically, the company is modeling a net sales decrease of 1% to 4%. The company is also bracing for full-year adjusted EPS between $4.05 and $4.30, implying a decrease between 41% and 45%.

Prospective investors can react to this forward guidance in a couple of different ways. Sure, they can be worried and avoid Clorox stock and/or dump their shares. Alternatively, they can envision a potentially positive earnings-event surprise in the future as low expectations are easier to live up to.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, CLX is a Moderate Sell, based on four Hold and six Sell ratings. The average Clorox price target is $134.60, implying a 0.24% upside potential.

The Takeaway

Clorox is a widely recognized and trusted brand name among consumers, but investors have valid concerns about inflation and supply-chain issues. However, the company’s CEO remains confident in Clorox’s ability to deal with these issues and deliver value for the company’s shareholders.

So, don’t hesitate to hold some Clorox shares for the long term and reinvest the dividends. If you’re ready to get defensive with a spotless investment strategy, Clorox stock is exactly what you’re looking for.

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