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Clorox Stuns Analysts with a Quarterly Beat

On Oct. 31, Clorox  (NYSE: CLX  )  reported first quarter results for fiscal 2014 and it exceeded expectations on both the top and bottom lines. This beat comes just weeks after several analyst downgrades, leaving those analysts in the dust and wondering what just happened. Let's take a deeper look into the quarter and see if we should be buying now or waiting for a slight pull back.

Squeaky clean company
The Clorox Company is a leading manufacturer and marketer of consumer and household products. It is home to some of the most popular brands that we use every single day, such as Clorox wipes, bleach, and disinfecting spray, Tilex, Kingsford, Pine-Sol, Liquid-Plumr, and Burt's Bees. In fact, 90% of Clorox's brands hold the No. 1 or No. 2 market share in their categories.

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The results
First quarter results for fiscal 2014 were released on Oct. 31, and Clorox narrowly surpassed the consensus analyst estimates. Here's an overview of the report:

Metric Reported Expected
Earnings Per Share $1.03  $1.00
Revenue  $1.36 billion  $1.35 billion

Earnings per share and revenue grew 2% year-over-year, while the company's gross margin remained flat at 42.9%. Volume for the quarter rose 1% versus estimates of zero growth, primarily driven by charcoal sales and strength in the Burt's Bees brand.

Given the expectations for flat revenue and decreased earnings per share year-over-year, the small growth was taken more positively than it may actually seem; paired with negativity surrounding Clorox from analyst downgrades going into the quarter, the narrow beat was enough to send the stock higher in the next trading session. Underestimating a company with a brand and product mix like Clorox is rarely a good idea, and analysts should take note. 

Outlook for '14
Clorox's management updated its outlook for fiscal 2014 in the first quarter report, and they now expect the following results:

  • Earnings per share between $4.45 and $4.60
  • 2%-3% sales growth
This outlook was below its previous earnings estimate of $4.55 to $4.70, but still right in line with analyst estimates of $4.57. The expected sales growth would put total revenue in the range of $5.73 billion to $5.79 billion, based on fiscal 2013 numbers. This is not high-growth by any means, but we invest in Clorox for consistent, stable growth and its bountiful 3.15% dividend. 

Industry strength
The household products industry has shown strength in 2013, with Clorox, Procter & Gamble (NYSE: PG  ) , and Kimberly-Clark (NYSE: KMB  ) all rising over 15%. Take a look at the key statistics:

Metric Clorox Procter & Gamble Kimberly-Clark
Market Cap  $11.8 billion  $219.9 billion  $41.2 billion
P/E  20.96 20.57   22.34
Forward P/E  18.41  17.37  17.62
Five-Year Avg. P/E  16.74  16.29  16.19
Dividend Yield  3.15%  2.98%  3.10%
Performance YTD  +21.7%  +16.4%  +25%

The S&P 500 has risen 20.35% year-to-date, so Clorox and Kimberly-Clark have outperformed while Procter & Gamble has underperformed. All three companies have favorable forward price-to-earnings multiples, but as you can see from the chart above, all are trading above five-year averages; this is a clear sign of industry-wide multiple expansion, meaning investors are willing to pay more for these companies.

Investors may seek the household product space as a safety play in an uncertain market, but I think the consistent growth and dividends are just too much to resist. An investment in Clorox, Procter & Gamble, or Kimberly-Clark would be a smart play on any weakness. 

The Foolish bottom line
Clorox is a great American company growing at a consistent rate in a growing industry. It has beaten analyst expectations and shown strength in the first quarter, which could provide a basis for the stock to rise over the next several weeks. I would not be surprised if the analysts who downgraded the stock changed their tunes and upgraded the stock in the coming days. Do not forget the healthy 3.15% dividend or the ongoing share repurchases the company will use to provide additional returns to shareholders. Clorox is the perfect consumer goods titan for any portfolio.

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9/26/2016 4:01 PM
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