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Where Will Clorox Be in 2 Years?

By Bradley Freeman - Dec 16, 2020 at 7:30AM

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Clorox's future success may not be able to replicate the strong performance seen in 2020.

In terms of COVID-19 beneficiaries, it's hard to find a more direct example than Clorox ( CLX -3.73% ). The company's various disinfecting products helped in the fight against the virus and stood out in a global pandemic that has made "clean" far more of a prerequisite than before.

While Clorox has certainly had a great 2020, there is no guarantee that its level of success can be maintained in the years ahead. Let's explore where Clorox might be two years from now when COVID-19 is -- hopefully -- brought under control and the world has returned to normalcy.

Can Clorox's success continue?

In the company's most recent quarter, sales grew by 27% year over year while diluted earnings per share more than doubled to $3.22. An unprecedented spike in product demand powered gross margin expansion from 44% to 48% year over year.

A person wearing gloves, spraying and cleaning a surface

Image source: Getty Images.

Furthermore, pandemic momentum even led to Clorox gaining a large commercial partner in United Airlines Holdings to ensure a sterile flying environment on all its planes. Clorox's main focus remains on maximizing the supply of its products -- pointing to demand remaining quite elevated across the board.

When you look at the company's price-to-earnings (P/E) ratio of 22.48 and its steadily rising dividend, it would seem that its financial outperformance provides some compelling value. When digging deeper, that same bargain becomes less apparent. Over the last 10 years, Clorox's sales growth remained consistently below 10%. The company's growth even turned negative year over year right before the pandemic struck earlier this year.

Since 1990, the 107-year-old company has seen its quarterly revenue growth rate spike above 10% on five separate occasions related to other recessions, other outbreaks like H1N1 flu (in January 2009), or when corporate acquisitions boosted inorganic growth. But, in each of those instances, the growth quickly returned to low single-digit percentage rates. It's highly probable that the current global health crisis is creating a powerful and temporary tailwind that is boosting Clorox's growth for now.

Because Clorox is generally considered a value/income stock these days, slowing growth due to a fading pandemic and an end to the current recession would not be the end of the world for the company from an investor standpoint, but it should be considered as a real possibility regardless.

Encouraging developments in biotech

Positive news regarding possible COVID-19 vaccines has recently surfaced, which, to many, signals the looming end of the pandemic. Among the various developments, Pfizer and Moderna both announced vaccine efficacy over 90% with AstraZeneca's inoculation efficacy coming in around 70%. Leading infectious disease expert Dr. Anthony Fauci has publicly expressed hope in a vaccine boasting higher than 70% efficacy.

The Food and Drug Administration (FDA) has officially granted Pfizer's vaccine Emergency Use Authorization and is expected to meet in this week to decide on at least one other. It's important to note that any authorized inoculation does not mean our world can simply go back to normal immediately. Supply constraints remain, and it will take some time for manufacturing and distribution to ramp up to a point of a widely available vaccine; broad vaccination is expected to take place in 2021.

When this does happen it may mark the end of Clorox's time in the growth spotlight. If society is not panicked over sanitizing every surface or avoiding catching a spreading disease, it makes perfect sense for that to eventually translate into less demand for Clorox's cleaning products. In two years that should absolutely be the case -- sales will not vanish, but growth should slowly revert back to historical trends.

So what? 

Clorox's 2020 financial performance has been strong. It effectively leveraged its niche as a cleaning company to power super-charged growth when COVID-19 made that niche far more relevant. Unfortunately for Clorox's demand, COVID-19 should slowly ebb as wide-scale vaccination takes place.

As that likely plays out, Clorox will likely again resemble the reliable value and income play it has consistently been in the past with growth rates perhaps returning to pre-pandemic levels. When that happens, investors will just have to be happy with 43 years of consecutive dividend growth -- making it a Dividend Aristocrat -- and a return to stable stock price changes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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