This story was originally published here.
The novel coronavirus outbreak — formally dubbed COVID-19 — has been bad news for pretty much every business in the U.S. Stocks reflect this reality. Year-to-date, the S&P 500 has dropped 25% on concerns that COVID-19 will bring the global economy to a screeching halt. Then there’s Clorox (NYSE:CLX) stock.
Clorox stock is up 25% year-to-date, mostly because consumers are stocking up on Clorox’s cleaning products as they prepare for “lock-down”.
But while everyone acknowledges that Clorox products are in high demand right now, some are starting to see Clorox stock as fully priced for this demand boost. Credit Suisse, for example, just downgraded CLX stock to a “Neutral” rating, based almost purely on valuation.
Is that the right call? Has the coronavirus rally in Clorox stock already run its course?
I think so. COVID-19 is more than just a near-term tailwind for Clorox’s business. It should supercharge demand for Clorox’s cleaning products over the next few years.
Ever so, Clorox stock is fully priced for that reality. Further upside from here — while possible — is not fundamentally supported. Consequently, if you’re a trader, trade away. But if you’re an investor, exercise caution in chasing this rally.
Coronavirus is a Multi-Year Tailwind
In two big ways, coronavirus is a good thing for Clorox’s business. The first and more obvious way is through panicked bulk buying of Clorox’s cleaning products, like disinfectant wipes.
Put plainly, consumers have a tendency to freak out. So long as the coronavirus keeps spreading, consumers will keep freaking out. They will keep panic buying, and sales of Clorox’s cleaning products will charge higher.
The second, and less obvious, way is through sustained elevated cleaning products demand over the next few years.
While the coronavirus outbreak should pass by the summer, memories will linger. Those lingering memories will compel consumers to start taking more regular action to stay healthy. The two most obvious and least intrusive ways to do that? Washing your hands and wiping down hard surfaces.
As such, over the next few years I believe we will see sustained strong consumer demand for hand soaps, hand sanitizers, and disinfectant wipes. Such cleaning products represent about one-third of Clorox’s total sales, meaning that a demand boost for these products will have a materially positive impact on Clorox’s overall growth trajectory.
Net net, thanks to coronavirus, Clorox has visibility to supercharged growth over the next few years.
Clorox Stock is Fully Valued
The problem with Clorox stock is that, on the heels of a 25% rally in less than three months, shares are fully priced for supercharged growth over the next few years.
For the past several years, Clorox has been a steady 1% to 3% revenue grower. Boosted consumer demand for cleaning products will likely push Clorox’s revenue growth to consistently be at the high side of that range, or about 3% per year. At the same time, strong demand will enable the company to expand gross margins, while steady 3% growth will drive positive operating leverage because the company doesn’t have a need to grow its expense base by much.
All in all, assuming supercharged cleaning products demand drives 3% revenue growth and margin expansion over the next few years, I see Clorox netting $9 in earnings per share by fiscal 2025. Note: that’s well above current consensus estimates for 2025 profits of less than $8 per share.
Consumer staples stocks normally trade around 20-times forward earnings. At its peak before 2020, Clorox stock featured a 25-times forward multiple. In a best case scenario, then, this stock will fetch a 25-times forward multiple in 2024. More realistically, it will fetch a 20-times forward multiple.
Assuming best case, then $9 in 2025 earnings per share equates to a 2024 price target of $225. That’s only 18% potential upside… over the next four years.
That’s not much. It’s certainly not enough to warrant chasing the stock on this rally.
Bottom Line on CLX Stock
I understand why Clorox stock has surged in response to the coronavirus outbreak. But shares are fully priced here and now. Even if cleaning products demand remains elevated for the next several years, long-term upside in Clorox stock from current levels is limited.
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