Believe it or not, this is an exciting time to be in the household goods business.
Consumer staples giant Clorox (CLX 0.53%) just reported sparkling fourth-quarter earnings, with revenue that grew by 9% and gross profit that rose by a full percentage point. To top it off, the company also boosted its full-year outlook for both profitability and sales. Procter & Gamble (PG +0.60%) investors will recognize that happy tune of growing profits, sales, and outlook, as it's the same song that P&G played for shareholders last week.
It's true that Wall Street isn't ignoring either company. Both P&G and Clorox hit fresh highs over the last few trading days. Still, their shares are each yielding a market-thumping 3%, and I think either could make a great investment at these levels, but for different reasons.
I'll share those reasons in a moment. First, here's a quick look at how the two firms stack up:
|
Metric |
Procter & Gamble |
Clorox |
|---|---|---|
|
Market Cap |
$206 billion |
$10 billion |
|
Price/Earnings |
17 |
20 |
|
Price/Sales |
2.5 |
1.9 |
|
Operating margin |
20% |
17% |
|
Dividend yield |
3% |
3.2% |
Source: Yahoo! Finance
What jumps out for me in this table is how evenly matched the valuations are. P&G looks a tad cheaper on a trailing P/E basis. But Clorox can be bought for a lower sales multiple, and it boasts a slightly higher dividend yield. Meanwhile, both seem cheap compared to rival Colgate-Palmolive (CL +0.09%), with its P/E ratio of 21 and its dividend yield below 2.5%.
But while statistics are a good starting point, they can't tell the whole story. For that, we'll have to dig into the companies' latest business results.
A strong fourth quarter
After a couple of sales and profit warnings sent shares diving last year, P&G has finally started to right the ship. It beat the Street's expectations for flat revenue and profits last quarter by clocking a 2% boost in sales and a 12% jump in earnings. Yes, those results were aided by cost cuts and pricing increases. And no company can keep that up for long. But an uptick in sales volumes also contributed to the beat. P&G even looks to be winning back some market share, as it held or grew share in the majority of its brands in the quarter.
Clorox's latest earnings were no less upbeat. The company got a clear boost from this year's strong flu season. Revenue from the cleaning products division, which includes disinfecting wipes, leapt by 15% as customers shelled out to keep their surfaces germ-free in the fourth quarter. But Clorox's great report was powered by more than just a banner cleaning season. Volumes were up across all geographies and divisions, including a double-digit shipment gain in the Burt's Bees brand. And Clorox benefited from cost-cutting and higher prices, too, leading to an expansion of gross margin from 41.5% to 42.5%.
A bright future
Clorox and Procter & Gamble both raised their full-year outlook on the strength of last quarter's results. Now they each expect organic sales growth of around 4%, rather than the 3% they had forecast before. That's an improvement for both companies, but it's a mark that Colgate-Palmolive had no problem hitting last quarter, on its way to 6% organic growth for the year.
For P&G's part, the company is banking on a strong slate of new product introductions in the back half of the year to boost sales even closer to that 4% target. It has seen success with innovations like its Tide Pods product in the U.S., and that's given management confidence to introduce the brand in Europe and other new markets starting this spring.
As for Clorox, the company saw brisk sales of its new concentrated bleach products last quarter. And a full product pipeline should help lift results through the rest of 2013. Another factor that should help Clorox's earnings is commodity costs. Thanks to a cooling inflation rate for inputs, those costs are expected to be flat this year, giving heft to the company's forecast to grow earnings faster than revenue for the full year.
Picking favorites
Thanks to those improving results and relatively low valuations, I think both companies look like solid investments at these levels. But if I had to pick one, I'd go with P&G. The company has a slightly smaller yield, yet it has a more comfortable 50% payout ratio, as compared to Clorox's 60%. And its broader portfolio gives it more potential upside as CEO Bob McDonald's cost-cutting plan and new product strategies continue to play out.
