A first look at Clorox
As I said in yesterday's e-mail, I'm always on the lookout for the most out-of-favor companies and sectors – looking for babies thrown out with the bathwater.
So today, let's take a first look at another company that fits the bill – Clorox (CLX)...
This 113-year-old manufacturer is best known for its namesake Clorox bleach and disinfecting products. It also owns Glad trash bags, Kingsford charcoal, Hidden Valley Ranch dressings, Brita water filters, and much more.
For decades, the stock was an extraordinary compounder – a classic "buy and hold forever" name.
But it has been crushed over the past five years. And today, it's trading at its lowest level in more than a dozen years.
You can see its steep decline in this chart going back to 1969, when the company went public on the New York Stock Exchange:
The stock hit my radar thanks to two posts earlier this month by my friend Chris Irons, who publishes on Substack under the name "Quoth the Raven," on May 1 and May 12.
In the latter essay, he wrote that Clorox...
... is exactly the type of name investors tend to ignore until it's already recovering. Everyone loves buying consumer staples when they feel safe. They love paying premium multiples for "quality" when narratives are clean and earnings are stable. Almost nobody wants these businesses after years of underperformance, shrinking expectations, ugly headlines, and multiple compression. That's usually when I become interested.
The Clorox Company is down more than 50% from its highs over the last five years and recently got hit again after earnings. Sentiment feels completely broken. The market is acting like this business is permanently impaired, yet we're still talking about a company that has existed for over a century and owns some of the most recognizable household brands in America. Investors today are getting a business with meaningful recurring demand, strong shelf presence, and a dividend yield north of 5% at a valuation that looks far more like distressed retail than premium consumer staples.
Chris acknowledges that the company's most recent quarter wasn't pretty:
Gross margins came in weaker than expected and management pushed full year sales guidance toward the lower end of prior expectations, now expecting revenue to decline roughly 6 percent this year. That's not good. But the market reaction still felt excessive relative to what was actually reported. Adjusted [earnings per share] still came in ahead of estimates, and some of the margin pressure stemmed from more temporary cost issues rather than signs that the business is structurally broken.
However, what continues to stand out to him is the strength of its underlying brand portfolio:
Clorox remains synonymous with disinfecting products. Glad continues to dominate trash bags. Kingsford essentially owns grilling season. Hidden Valley Ranch has become its own cultural phenomenon at this point. Burt's Bees, Brita, and Fresh Step all still hold meaningful brand equity as well.
There's a growing narrative that private label brands will slowly destroy businesses like Clorox. That risk is real, but I think it gets overstated. These are not all commodity products where consumers blindly choose the cheapest option every time. Cheap garbage bags rip. Off brand ranch can ruin a meal. Consumers trust brands like Brita for something they literally drink every day. In many of these categories, paying a little more for trusted products feels completely rational. I think the market may be underestimating how durable that consumer behavior actually is.
I think Chris makes an interesting case. So let's take a look at the company's historical financials...
Thanks to numerous strong brands, Clorox has high gross and operating margins. They declined sharply in 2022, but have mostly – though not fully – recovered since then:
Revenue grew slowly and steadily until 2021. It has declined 8% since then, while operating income has fallen 14% – not good, but not catastrophic:
Free cash flow ("FCF") follows a similar trajectory, though with a more concerning decline. After peaking at $1.3 billion in 2020, it has tumbled 71% to just $380 million in the past 12 months:
FCF is no longer sufficient to cover Clorox's dividend, which costs the company $602 million annually to sustain its current 5.3% yield.
Clorox has also sporadically bought back stock and made a handful of acquisitions over the past two decades:
Net debt has been rising since 2017, as the combination of acquisitions, dividends, and share repurchases has exceeded FCF. But it's not at a dangerous level – yet:
Clorox is a good company with decent margins, low capital expenditures ("capex"), and consistent FCF, even during times of economic turmoil.
But all the trends are heading in the wrong direction. Overall, the financials paint a troubling picture...
I suspect the company will have to scale back share repurchases and maybe even cut its dividend.
No wonder the stock is down around 60% from its peak – from nearly $240 in August 2020 to yesterday's close of $94.26.
It might seem tempting to bottom-fish this stock if it were really cheap... but it's not.
It's currently trading at a price-to-earnings (P/E) ratio of 15.6 times consensus analysts' estimates over the next 12 months. That's roughly half of where it was just three years ago, as you can see in this chart:
Given the red flags in the financials, I'd only be interested in this stock at maybe 12 times forward earnings – or better yet, 10 times.
This prescient short pitch for Clorox posted on Value Investors Club outlines the bear case for the stock (only members can view the full post). It was made on June 6, 2023, when the stock closed at $158.58:
During the pandemic, Clorox benefited from a surge in demand for cleaning and other household products. However, consumer demand for Clorox's products began to normalize last year, and in recent quarters the company has relied on steep price hikes to drive organic growth, which has resulted in negative volume trends (-10% to -15% [year over year] in most recent quarters).
While consumer demand has started to normalize, industry supply is in many cases above pre-pandemic levels, as Clorox and other industry participants added capacity during the pandemic to meet record-demand levels... We believe that we are now beginning to see the impact this is having in some categories.
Despite CLX's exposure to low-growth product categories where it appears to face increasing competitive pressures, CLX trades at a rather full valuation (~35x/~28x [expected 2023/2024] consensus earnings).
My Stansberry's Investment Advisory team and I will keep an eye on Clorox. But we're going to need to see concrete signs of a turnaround or a much more distressed valuation before we consider recommending it.
If we decide it's time to buy, as always, Investment Advisory subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. I said goodbye to my parents, sister, and friends this morning and am on my way home. After six hours of driving ambulances from Dresden, Germany to Kraków, Poland yesterday, we went out to dinner and walked around Kraków's magnificent old town. They and 55 other volunteers will drive into Ukraine tomorrow to deliver the ambulances in Kyiv. Here are some pictures:
