After a tough bout with inflation that wasn't fully paired with additional pricing power, The Clorox Company (CLX 0.86%) looks like it's finally on the mend.
Last quarter's top line was only up 1% year over year, but gross profit margins jumped from 33% to 36.2% of sales. Earnings per share improved 48% from year-ago levels, boosted by (among other things) savvy cost-cutting. Guidance for the remainder of the fiscal year ending in June is healthy enough as well. All of it prodded the stock 7% higher on Friday of last week to a new multi-month high.
It could be an omen of more bullishness to come. I'm not interested in buying it, though -- at least, not yet. The stock is still ridiculously expensive, and it isn't apt to grow into a fairer price anytime in the near future.
On the right road, but moving far too slowly
Valuation can seem an antiquated stock-picking premise. For some investors these days, it's all growth. Worry about profits down the road, right? But the funny thing is that valuations don't matter right up until the point when they do. Then they matter in spades.
With that as the backdrop, know that Clorox shares are currently priced at more than 36 times their trailing per-share profits, and more than 31 times their projected earnings for the coming four quarters. Even looking out to fiscal 2024, the shares are valued at more than 28 times that year's expected earnings.
All three of these measures indicate the stock is more richly priced now than it has been at any point during the past 10 years.
Don't misread the message. The company is doing what it's supposed to be doing. It's growing. The past few quarters have been challenging ones for all companies, and have proven particularly tricky for the low-margin consumer goods industry. Clorox has handled higher costs of doing business in highly competitive markets quite well. Now, it's working its way out of that lull.
Data source: Thomson Reuters. Chart by author. Revenue figures are in millions of dollars.
That rebound isn't happening quickly, however, simply because it can't. Adapting takes time when it's done at a corporate level. Meanwhile, although the inflation rate is contracting, it's still well above long-term norm. It could take months (if not quarters) before rising input costs finally fall to the Fed's long-term target of around 2%. The interim could be tough for this outfit.
It's not like the analyst community isn't connecting these dots, either. While the company is on the road to recovery, analysts collectively rate this stock at "underperform." These same analysts are sticking with their consensus price target of $138.72 per share as well, which is roughly 9% below the stock's present price.
Don't make it complicated
Don't panic if you already own Clorox shares. There are some bright spots here. The stock's dividend yield of 3% is above the current marketwide average, and that dividend is being paid like clockwork regardless of the stock's valuation. Earnings will also eventually catch up with the stock's current price. Once that happens, look for capital gains as well as continued dividend income.
If you've got any other prospect in mind to round out your existing portfolio with a consumer staples name, however, look elsewhere. This is particularly prudent advice in light of a likely shift toward a market environment that favors value stocks over growth stocks. For value stocks to perform, there has to be enough actual value reflected in their present prices to push them higher.
Right now, Clorox is priced more like a growth stock even though basic consumer goods companies like it are almost exclusively considered value names.
