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Is Clorox a ‘Buy’ after Its Stellar Q3 Results?

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Clorox (NYSE:CLX) raised its outlook for 2020 after the company generated strong sales in the third quarter of fiscal 2020. The company’s third-quarter sales rose 15% YoY (year-over-year) to $1.78 billion. Increased demand for disinfectants and other cleaning products amid the COVID-19 pandemic drove the strong sales growth. Clorox beat analysts’ sales estimate of $1.71 billion.

The company’s third-quarter EPS of $1.89 also beat Wall Street’s forecast of $1.67. The EPS rose 31.3% YoY due to the company’s strong sales and gross margin. However, higher selling, general, and administrative expenses and increased advertising expenses had a negative impact on the earnings.

Clorox’s gross margin expanded by about 330 basis points YoY to 46.7% in the fiscal third quarter. Strong volumes, cost savings, and higher pricing in certain international markets drove the gross margin. Meanwhile, the company has temporarily suspended its share repurchase program amid the crisis.

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Clorox’s Q3 sales drivers

Clorox’s sales growth in the third quarter was mainly a result of the 32% rise in its Cleaning segment’s sales to $671 million. Notably, Clorox disinfecting wipes and sprays, bleach, Clorox Healthcare germicidal wipes, and other disinfecting products experienced increased demand due to COVID-19. Over two-thirds of the Cleaning segment’s sales were generated from products with disinfecting claims.

The third-quarter sales also benefited from a 10% growth in the Lifestyle segment’s sales to $339 million. Within the Lifestyle segment, water filtration, food, and natural personal care categories delivered strong growth. However, dietary supplement sales declined due to supply chain disruption associated with COVID-19.

The Household segment’s top line grew 2% YoY to $500 million. Higher sales in the cat litter category and grilling products drove the segment’s performance.

Meanwhile, Clorox’s international sales grew 11% to $273 million. Excluding currency headwinds, international organic sales rose 22%.

Upbeat guidance

Clorox raised its 2020 guidance to reflect higher demand for its products amid the COVID-19 outbreak. Now, the company expects sales growth of 4%–6%. Earlier, Clorox expected a low single-digit decline to a 1% increase in its 2020 sales. Also, the company expects 2020 organic sales growth between 6% and 8%. The company raised its EPS guidance to $6.70–$6.90 compared to the prior forecast of $6.10–$6.25.

As of May 1, Clorox stock was trading at a 12-month forward PE ratio of 27.7x. In comparison, Procter & Gamble (NYSE:PG), Kimberly Clark (NYSE:KMB), and Colgate Palmolive (NYSE:CL) were trading at forward PE ratios of 22.7x, 18.1x, and 24.0x, respectively.

Clorox stock has risen 25.5% YTD (year-to-date). The stock has outperformed the S&P 500, which has declined by 12.4% in 2020. Clorox stock has also fared better than its peers. As of May 1, Procter & Gamble, Kimberly Clark, and Colgate Palmolive stocks have fallen by 6.5%, 0.6%, and 0.5%, respectively, YTD.

Clorox is positioned to deliver a strong sales growth rate, although not as impressive as the growth in the fiscal third quarter. There would be continued demand for disinfectants and cleaning products. The pandemic will likely continue for months. Also, people will likely continue to focus on hygiene even when the COVID-19 fear fades.

While other companies reduce their expenses, Clorox expects advertising and sales promotions to represent 10% of its 2020 sales. Through the company’s advertising efforts, it aims to build long-term loyalty for its brands.

Currently, Clorox stock is trading at a higher valuation compared to its peers. The stock is still a “buy” based on strong growth expectations due to COVID-19 led demand.

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