Login

CLOROX CO/DE CLX S
August 02, 2019 - 11:53am EST by
jso1123
2019 2020
Price: 158.00 EPS 6.45 6.30
Shares Out. (in M): 127 P/E 24.5x 25.0x
Market Cap (in $M): 20,000 P/FCF 0 0
Net Debt (in $M): 2,600 EBIT 0 0
TEV (in $M): 22,600 TEV/EBIT 0 0
Borrow Cost: General Collateral

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

focus on increasing private label penetration. As a result, CLX has less ability to take price without losing market share. The
business is less defensive than historically given intensifying headwinds. Trading at 25x PE (2x leverage), the Company is
overvalued for a Company that is expected to only grow earnings MSD% with a 2.5% dividend yield. Earnings are more
likely to grow LSD%, which will also force the multiple to contract. $6.30 x 20x PE = $126 (down 20%).
 
 
Background:
 
• Cleaning segment products (34% of sales): Products in the Cleaning segment include home care goods such as Clorox disinfectant
wipes, Pine-Sol cleaning fluid, and Formula 409 spray, laundry goods such as Clorox bleach and detergent, and
professional goods used mainly in the food-service industry under Clorox, Dispatch, and Healthlink brands.
 
• Household segment products (32% of sales): Products in the Household segment include Glad brand trash bags and food wraps,
Kingsford charcoal, FreshStep cat litter, and ReNew Life digestive health products.
 
• Lifestyle segment products (17% of sales): Products in the Lifestyle segment include Hidden Valley and KC Masterpieces salad
dressings and sauces, Burt’s Bees lip care and other personal care products, Brita water filters, and Nutranext
nutritional supplements.
 

International (17% of sales):  a cross section of these products.  The business is primarily (85%+) domestic. 

 
 
 
Investment Thesis / Variant Perception:
 
- Intensifying Structural Headwinds: Recently implemented price increases to drive margin expansion will be
unsuccessful as Clorox will be forced to pull back as it loses market share to private label and other branded players
that were less aggressive on pricing. Clorox will have a much harder time increasing prices than historically driven
by increased retailer focus on private label and price transparency online. Most of Clorox’s products compete with
private label brands. Private label brands are sold at a lower price than nationally-advertised brands. While private
label competition has been a consistent threat to branded consumer products, we believe the threat is intensifying
driven by hard discounters expansion (Aldi, Lidl) and Amazon forcing a competitive response from traditional
retailers (WMT, TGT, etc.). Wal-Mart is 26% of CLX’s sales.
 
As Clorox has attempted to take price, it has resulted in market share losses.
 
The weakness has been driven by market share pressures in three key categories: 1) Glad trash bags, 2) Clorox
disinfecting wipes, and 3) charcoal.
 
 
 
 
 
Post 2H17 commodity cost pressures, CLX was one of the first consumer staples companies to announce price
increases. Net, price increases have covered 70% of the portfolio. While price increases have gone well in some
categories, CLX will need to roll back pricing / get more promotional to stem market share challenges in the
aforementioned categories.
 
 
 
 
Risk/Reward: CLX’s absolute growth has slowed versus history. Further, CLX has gone from outgrowing its HPC peers of
PG/CL/CHD to underperforming. As such it deserves to trade at a discount versus historical valuation and peers. Price
target of 20x $6.30 in 2021 earnings = ~$125/share (-20% downside)
 
 
 
 
Key Risks:
 
 
 
• Decline in Treasury Rates: Consumer staples are historically valued on a spread to the risk-free rate.
 
• Decline in commodity costs: Key commodities include resin, diesel, sodium hypochloride, corrugated cardboard,
soybean oil, jet fuel, and other agricultural commodities.
 
• Short Interest: Short interest is modest at 5% of shares but could create buying pressure if sentiment becomes
more favorable.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Negative revisions to organic growth and earnings

 

    show   sort by    
      Back to top