EUR 850.00 For Business Accounts Only

Morningstar | Clorox Not Immune to Intense Competitive Pressures, but Long-Term Edge Unwavering; Shares Rich

Despite the high-single-digit downdraft in shares following third-quarter results that included 2% sales growth, 60 basis points of gross margin expansion to 43.4%, and 20 basis points of operating margin improvement to 17%, we don’t intend to alter our $138 fair value estimate or long-term outlook (calling for just shy of 4% sales growth on average annually and operating margin gains of 150 basis points relative to fiscal 2018 to 20% over the next decade) for wide-moat Clorox. Even after accounting for this pullback in shares, we continue to view the stock as slightly overvalued, trading at nearly a 10% premium to our valuation.

From our vantage point, the market’s hang-up with the firm’s performance is anchored in the recent erosion in its wipes and bags categories, following actions to raise prices over the last several months to offset inflationary pressures stemming from higher commodity, transportation, and logistics costs (the combination of which negatively affected gross margins in the quarter to the tune of 240 basis points). Management alluded to the fact that a less severe cold and flu season weighed on Clorox’s wipes segment and the category as a whole (which fell at a mid-single-digit clip versus double-digit category growth a year ago). As it pertains to the firm’s wipes business, the firm suggested the shortfall stemmed from widening price gaps, due to increased promotional spending by its competitors.

In light of pricing actions across the consumer products landscape, we’ve long thought volume compression could emerge. However, we haven’t wavered on our stance that in light of Clorox’s long-standing commitment to bring value-added innovation to market and invest to tout this fare in front of consumers, we think these headwinds should prove transitory long term. We forecast Clorox will spend about $700 million annually (12% of sales) on research and development and marketing to support its brand intangible asset.