Few publicly traded companies have done better in the COVID-19 pandemic than Clorox (CLX 0.50%). While some industries faced overwhelming challenges from virus-induced shutdowns, Clorox thrived. Its portfolio of cleaning products was ideal in an environment featuring the public focusing more and more on constant sanitizing and hygiene.
Investors took note of the strong Clorox tailwinds. Not only did Clorox avoid the March stock market crash, the stock price jumped 40% above its previous all-time highs since the shutdowns began. Can this run continue? Let's explore.
New Clorox partnerships
The pandemic enabled CEO Benno Dorer to make new revenue-generating partnerships for the company. This year, Clorox announced one such partnership with United Airlines Holdings and the Cleveland Clinic to elevate the cleanliness of planes. The program (called United CleanPlus) aims to limit air travel contact and risk for all passengers and has been very well received by United customers.
Under the auspices of the Cleveland Clinic, Clorox is also working directly with United to make flying safer in every way possible. From self-scanning boarding passes and Clorox's famous disinfecting supplies to sneeze guards for employees, United is all-in on cleaning. Clorox worked directly with a global airline and a world-class hospital to successfully create realistic solutions to COVID-19. It is feasible to think that more announcements like this are coming, but with the stock price already lofty, will new announcements send the stock even higher?
A lofty valuation and fading growth
Following the impressive stock move, Clorox now trades for 32 times mean 2020 earnings estimates (price-to-earnings ratio, or P/E), a sizable premium to the lofty 22.8 P/E the S&P 500 currently fetches. From a sales perspective, Clorox also trades at a valuation premium, trading hands at 4.2 times sales compared to the S&P 500's more modest 1.5 times sales.
Furthermore, Clorox's time in the COVID-19 spotlight may be coming to a close. Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, has repeatedly expressed his expectation of a vaccine by the end of the year. Even if the inoculations take longer, a solution limiting the coronavirus mortality to zero would rapidly ease the public's concern. Humanity's attention span for a crisis is short (think airlines post-2001), especially when the threat no longer exists. In this scenario, it is reasonable to think Clorox's growth will revert to historical norms.
Growth was undeniably impressive during the pandemic, with company sales growing 15% and earnings growing 31%. If Dorer and leadership can maintain this impressive growth, then yes, the valuation premium is deserved. Analysts, however, are not confident it can do so; it looks like Clorox is priced for perfection. Sales from 2020 to 2021 are expected to grow just 1.9%, with earnings set to jump 3.9%. Neither metric screams that Clorox is a growth stock deserving a valuation premium like what it currently enjoys.
While the pandemic juiced growth for Clorox temporarily, there is no guarantee that that boost will persist. Our world will return to normal at some point, and when it does our obsession with cleanliness may wane. For investors who profited handsomely off Clorox's rapid rise, it may be time to take some profits. Investing in short-term trends can end badly, and Clorox's temporary COVID-19 boost already looks to be fading.