Clorox's Earnings Dip, Sales Rise: Should You Buy?

The king of bleach, Clorox (NYSE: CLX  ) , recenlty released its third-quarter report, and the stock reacted by moving lower afterward. The results were mixed compared to expectations, and the company's outlook did not help the situation, leaving investors wondering what to do. Let's take a look at the Clorox report and guidance for the rest of the year to determine what moves investors should make.

The cleaning-products giant
Clorox 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 day, such as Tilex, Kingsford, Pine-Sol, Liquid-Plumr, Burt's Bees, and Hidden Valley; in fact, 90% of Clorox's brands hold the No. 1 or No. 2 market share in their categories.


Source: Clorox.

The results
Clorox released second-quarter results for fiscal 2014 before the market opened on Feb. 4. The results were mixed compared to analyst estimates:

Metric Reported Expected
Earnings per share $0.88 $0.91
Revenue $1.33 billion $1.31 billion

Clorox's earnings per share declined 5.4% and revenue increased 0.4% year over year as global volume rose by just 1%. Gross profit fell 1.1% to $557 million and gross margin declined 61 basis points to 41.88%, as Clorox faced higher costs in commodities, manufacturing, logistics, and advertising. On a segment-by-segment basis, cleaning and international sales were the bright spots for Clorox, but the household and lifestyle segments offset most of the gains. Here's a breakdown of its growth by segment:

Segment Volume Sales Pre-Tax Earnings
Cleaning 3% 2% 1%
Household (1%) (1%) (27%)
Lifestyle (1%) 0% (1%)
International 2% 1% 20%

Overall, it was not that bad of a quarter, but it was nothing to write home about, either. On a side note, the company did note that it still anticipates free cash flow will represent 10% of its total sales, which will allow it to continue paying its dividend and raising it while repurchasing shares. That said, if Clorox's stock falls in the coming days, the yield will grow, and I think this would be enough to entice investors to pile back in.

Outlook on the year
Clorox also updated its full-year guidance for fiscal 2014. The new guidance is lower:

Metric Updated Outlook Previous Outlook
Earnings per share $4.40-$4.55 $4.45-$4.60
Sales Growth 1%-2% 2%-3%

This was not the worst-case scenario for Clorox, but it still was not what investors wanted to hear. The consensus analyst estimate calls for earnings per share of $4.54 for the year, so if Clorox can perform to the high end of its new expectations, it will be fine. With all of this said, the main thing I will be looking for in the next two quarters is a dividend increase. 

A glance at the industry
As Clorox has reported consistent results, two of its top competitors, Proctor & Gamble (NYSE: PG  ) and Kimberly-Clark (NYSE: KMB  ) , have cruised right along too. Procter & Gamble is home to 25 billion-dollar brands, including Tide, Gain, Gillette, Charmin, Pampers, Duracell, and Crest. Kimberly-Clark is the company behind brands such as Kleenex, Cottonelle, Depend, Huggies, Kotex, Poise, and Scott. Both peers recently reported quarterly results as well:

Company P&G Kimberly-Clark
Earnings growth (1%) 5.1%
Revenue growth 0% 0%
Organic sales growth 3%  5%

Even though the industry has not experienced much earnings or revenue growth, the three giants within it have still been able to show organic growth and pay out healthy dividends. Currently, P&G yields a little more than 3.15%, Kimberly-Clark yields about 3.1%, and Clorox yields roughly 3.3%; these strong dividends will keep cash flowing to investors while they wait for the stocks to show price appreciation. When it comes to new investments today, my favorite stocks are Clorox and Proctor & Gamble, since both trade more than 10% below their 52-week highs, but Kimberly-Clark is the best company overall. All in all, investors could take their pick of these three and do no wrong for their portfolios.

The Foolish bottom line
Clorox is an American titan that simply stumbled in its earnings report. The stock has fallen, rebounded higher, and fallen again following the report's release, so investors should wait for the erratic trading to subside before initiating new positions. Procter & Gamble and Kimberly-Clark are two other great options in the industry, so keep a close eye on all three going forward.

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