Consumer cleaning goods manufacturer Clorox (CLX -0.02%) has never been on most investors' "growth stocks" list. But now, in the era of COVID-19, is it time to wipe away past prejudices against the bleach brand? Based upon recent performance and the sold-out status of products at the local grocery, the answer (for now) is yes.
We're living in the current future
Wash your hands. Wipe down surfaces. Decontaminate doorknobs. Don't touch your face.
These are our modern mantras as the world struggles to contain the pandemic. With all this emphasis placed on cleanliness, a company that makes products that are particularly effective weapons in the coronavirus war would seem to be a solid investment — especially since this won't be over by Easter Sunday, as some suggested. So at least for the near term, investors can clean up on Clorox.
Aggressive consumers stock home arsenals
"Based on conversations with retail buyers, we estimate COVID-19 related demand could boost baseline disinfectant category trends by three to five times in the next few months as retailers work to rebuild inventory and stay in stock," Swiss-based UBS Group (UBS -0.91%) analyst Steven Strycula told Yahoo Finance on March 16 .
Wall Street has wobbled the past couple of months, but Clorox has kept a steady stance. In fact, Clorox stock rose as much as 20% even as the Dow Jones went down https://finance.yahoo.com/quote/CLX?p=CLX&.tsrc=fin-srch. As long as the pandemic continues, demand for products like bleach sprays, disinfectant wipes, and other sanitizing products will continue.
Clorox is well poised to ride this demand — sanitizing products make up about 25% of its product line. Sure, panic buying is a part of this, but the pandemic seems to be retraining all of us into a hygienic and sanitized mindset. The longer the coronavirus is around, the more adapted we will be to this new normal. We are becoming trained infantry in this global war.
4 reasons to buy Clorox now
Predicting the future of anything requires a close examination of the past. This is especially true in equities. Looking down the road for Clorox with one eye on the rearview mirror, investors can expect a stretch of cruise-control driving. Here's why:
First, there is the Zika precedent. During the summer of 2016 and into the first months of 2017, global fear rose over the Zika virus. It almost canceled the Summer Olympic Games in Rio de Janeiro like COVID-19 put off the Tokyo games this year. The mosquito-borne illness began in Brazil, and the epidemic threatened half a billion people, spreading to more than 87 countries. Mosquito repellent flew off the shelves (no pun intended).
Companies like Spectrum Brands Holdings, Inc. (SPB 0.91%), makers of the Cutter and Repel (rivals of Off!) insect repellent, saw mosquito-related sales boom. By April 2016, as the Zika virus outbreak was just getting warmed up, Spectrum reported a 25% increase in profits for its home and garden sector, and the company overall saw revenue grow from $27.8 million for Q1 2015 to $75.2 million for the same period in 2016 — a surge of $0.52 per share.
Once the outbreak was contained by the beginning of 2018, bug spray sales slowed considerably. COVID-19 looks to linger longer than Zika did, and Clorox will be less known as a panic buy and more as an accepted necessity.
Second, Clorox has unique products for a unique demand. As mentioned above, bleach and disinfectant wipes and sprays make up about one-quarter of the Clorox product line. They are hot sellers right now, and they look to be in demand for many months to come. In my own experience, people line up outside our neighborhood CVS on the day supply trucks arrive to be the first in the door to buy these and other personal hygiene products.
Third, Clorox is gearing up for the demand. It recently ramped up production and created a product supply team to monitor and maintain the supply chain. Plus, it is marketing specific products like Clorox Disinfecting Bleach, Clorox Clean Up + Bleach, and Clorox Disinfecting Wipes, which have been approved by the Environmental Protection Agency under its Emerging Pathogens policy as COVID-19 effective products
And fourth, the coronavirus pandemic is helping Clorox stretch its advertising dollar further. Awareness is ramping up. Everywhere you turn, from the nightly news to Facebook to TikTok, there is COVID-19 content. It's ubiquitous. Washing hands and sanitizing our environment are matters of survival now, along with social distancing, of course. If Clorox has to spend less on advertising because the global word of mouth campaign is handling much of that effort, that means more profit and a better return for shareholders.
Days of wine and neuroses
UBS analyst Steven Strycula's take is is of the opinion Clorox will see its earnings increase by about 40% in the current fiscal year. Admittedly, his opinion is in the minority...right now.
The consumer-products industry Clorox operates in has gotten more competitive in the past few years, and there's a lot of elbowing for shelf space. Clorox has historically been considered a Dividend Aristocrat; it started paying dividends in 1968, and it's boosted that payout each year for 42 straight years. But these are uncharted waters we're steaming into. As long as the pandemic rages, so will worry. As long as worry persists, companies that offer relief from the neurotic new normal will thrive, and investors can expect results.