KIEV, UKRAINE – 2019/01/02: In this photo illustration, the Clorox Company logo seen displayed on a … [+]
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Clorox (NYSE: CLX) stock has rallied by about 35% year-to-date, amid the coronavirus pandemic, compared to the broader markets which are down by about 10% year-to-date. Clorox has seen soaring demand for its disinfecting products, as people look to clean and disinfect surfaces around their households to prevent the spread of the highly contagious viral infection. That said, we think that the stock may be overvalued at this point, considering that it is also up ~48% from levels seen in early 2018, a little over 2 years ago, despite posting weak revenue growth in the past. Although the cleaning products are likely to boost growth over 2020, they only account for a small portion of the company’s revenues. Our dashboard Why Clorox Stock moved 48% provides the key numbers behind Clorox’s rally.
Historical Growth Was Muted, But P/E Multiple Has Expanded In Anticipation Of COVID-led 2020 Growth
Clorox Revenues have grown by just about 4% over the last 2 years, rising from around $6 billion in 2017 to about $6.2 billion in 2019. The company’s net income, on the other hand, has expanded 17% from $700 million to $820 million over the same period, due to a lower effective tax rate. EPS grew slightly faster than net income, due to a 1% decline in the company’s share count. However, a bulk of the company’s stock price appreciation came from the expansion of its P/E multiple from levels of around 26x in 2017 to about 32x currently.
Household Cleaning Products Account For Just A Quarter Of Clorox Revenue
Although Clorox is best known for its eponymous cleaning and sanitization products, its home, and professional cleaning segments accounted for just about 25% of total revenues in FY’19 (FY ends June). About 75% of revenues came from products such as laundry care, trash bags, and containers, and water filtration products and other items which have little reason to see increased demand through or after the coronavirus pandemic. This means that the revenue bump through the pandemic will be focused on a relatively small portion of Clorox’s product line. Moreover, the company is having trouble with meeting demand, despite boosting production of its disinfectant products by 40%. Considering the big bump Clorox’s P/E multiple has seen in recent months, and considering the fact revenues from cleaning products could return to more normal levels post the pandemic, the company could see significant valuation risk. We outline a scenario that could see Clorox stock decline by 20% from current levels, in our dashboard analysis How Clorox Stock Could Fall To $170
Are Personal Protective Equipment stocks a better way to play the COVID economy than consumer staples? View our indicative analysis on the Coronavirus Impact On PPE Stocks for more details on U.S. listed PPE stocks.