Patient Clorox shareholders clean up

In June 2022, shares of The Clorox Co. (NYSE:CLX) fell as low as $120.50, marking a disorderly 50% drop from their all-time high. The bleach maker’s loyal shareholders who weathered the drop are now cleaning up.

Clorox is up nearly 30% since last summer, helped by Friday’s 10% rise which was atypical for a defensive name. The high-volume gapper came at the hands of an explosive earnings report – and brought the stock back within dollars of its 52-week high.

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

Consumer staples have lagged behind this year’s stunning rebound, but we’re not off the hook yet. A looming recession and arguably overheated stock market make Clorox something to keep on the radar.

What did we learn from the Clorox earnings report?

Clorox sales in the second quarter of the fiscal year increased 1% year over year as price inflation offset lower volumes. The result was significant as it 1) reversed an 8% decline in sales in the year-ago quarter and 2) beat the consensus expectation of a slight drop in revenue.

The company posted adjusted earnings per share (EPS) of $0.98, representing growth of 48%. Wall Street was braced for a major drop in earnings, so the surprise led to strong buying activity in a stock that faded ahead of the report.

The rise in earnings reflects not only better pricing, but also the success of cost reduction initiatives that have offset rising raw material, manufacturing and logistics costs. Quarterly cost savings hit a decade high.

The performance told us Clorox’s brands are more relevant than ever despite inflation and rising rates putting pressure on households around the world. Shoppers continued to pay for trusted cleaning products, kitty litter and yes, Hidden Valley Ranch dressing. He also confirmed that recent investments in digital capabilities are making operations more efficient and driving product innovation.

Buoyed by rising prices, the company raised its earnings outlook for the full year. He now sees adjusted EPS of $4.05 to $4.30, which at the midpoint would be 2% growth from his previous forecast of a 2% decline. Management does not expect any additional price increases, however, meaning the increase in guidance is larger.

Clorox revealed that more layoffs are coming after an initial round of layoffs in September 2022. The announcement highlights an ongoing cost-cutting trend hitting workers at mega-cap tech companies and non-cyclical companies.

What do the charts say about Clorox?

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

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 towards $200.

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

Is Clorox stock a good investment?

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

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

Yes, Clorox deserves a premium multiple given that it outperforms most of its peers. But a 50% bonus seems over the top, with price increases on hold and the leverage of the company’s balance sheet notoriously high.

There will likely be a better entry point when investors have the chance to get on a company that suddenly has good momentum. When that time comes, the investment will not only provide exposure to a strong brand portfolio and a resilient global consumer, but also a better income. When the forward dividend yield approaches 3.5%, it may be a better opportunity to mop up that dividend aristocrat.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.