Clorox's (NYSE: CLX ) profits, sales, and volumes are all up. So why does the consumer-staples company continue to trade at a wide discount to peers?
The company behind such household brands as Brita, Fresh Step, and Glad posted fiscal-2010 second-quarter sales of $1.28 billion -- 5% better than the year-ago period. And that's quality growth, driven mostly by volume gains instead of pricing and foreign exchange tailwinds.
Earnings per share came in at $0.77, representing a 26% year-over-year jump. Profit was goosed by improved top-line results and dramatically wider gross margin. The latter owed to lower commodity costs and efficiency initiatives, among other factors.
Yet shares are trading at a forward P/E of 13, nearly unchanged from October 2009. The market, methinks, must be tuning into other factors.
For starters, consumption in U.S. "tracked channels" was down slightly during the quarter. But as management pointed out to conference-call listeners, this data represents only about a third of the company's U.S. business volume -- no surprise, given that the data doesn't include sales at major retailers such as Wal-Mart Stores (NYSE: WMT ) . Moreover, Clorox's quarterly U.S. product shipments increased 6%, suggesting that the consumption figures, however flawed, may be set for a turnaround.
Previously, I discussed the company's vulnerability to consumer trade-down, but management just reported that "private label growth was less of a factor than it has been in the last several quarters." Reason for the stock to rally, no?
Ultimately, I'm guessing that investor reluctance can be traced to management's price-cutting ways. The evidence is stark: In three of the company's four segments, sales growth meaningfully lagged volume gains. Citing competition at the shelf, management was fighting back via product discounts, and elsewhere noted that it was "vigorously defending" market share with pricing adjustments.
Summarizing what could be majority sentiment, one marketing expert noted that sales promotions run the risk of conditioning consumers to expect, and wait for, lower prices.
There are also product-specific trends that evoke concern. The company's Glad food bags, for instance, continue to sell poorly. Meanwhile, the reusable storage products offered by Tupperware Brands (NYSE: TUP ) have held up relatively well.
Nonetheless, my sense is that the market has gone overboard on worry, leaving shares at least moderately undervalued. Management, for one, expects the industry's aggressive product discounting to ease toward the end of 2010, as rising commodity costs prohibit flexible pricing. That strikes me as a reasonable forecast. So long as the company can hold volumes, the market will, at that point, have little excuse to avoid shares.
In the meantime, I continue to believe that Clorox would make an attractive acquisition for a global behemoth the likes of Procter & Gamble (NYSE: PG ) . And while the company will never be as exciting or cutting-edge as a Whole Foods (NYSE: WFMI ) , Green Mountain Coffee Roasters (Nasdaq: GMCR ) , or Hain Celestial (Nasdaq: HAIN ) , its Burt's Bees and Green Works brands are definitely in the sweet spot of long-run health and sustainability trends. Not bad for a boring and overlooked name.
Do you think Clorox will clean up, or does its future look grimy? Share your thoughts in the comment box below.
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