With the spread of the novel coronavirus only getting worse in the United States and elsewhere, many companies have seen their shares rise sharply. They are generally around diagnostic tests, vaccines and potential cures. Another beneficiary of the coronavirus has been makers of cleaning products, and the de facto leader here happens to be Clorox Co. (NYSE: CLX). It turns out that almost nothing survives a Clorox bleach bath, and sales of its products, from chemicals to the wipes for offices and homes, have been deemed a big winner. Even during the market panic, Clorox has held up.
Independent research firm Argus has decided to upgrade Clorox stock to Buy from Hold, and the firm set a $195 target price. Its shares are generally considered to be very defensive in the consumer products, to the point that it is often considered recession-proof and it often rises when the general stock market weakness is hurting other sectors. Clorox shares were barely lower on Monday despite a drop of more than 6% in the Dow and S&P 500. As of Friday’s close, its shares were up 11% from the closing price of February 3.
The Argus report even said point blank that it expects sales of Clorox products to benefit from the coronavirus outbreak. It also noted that the company is already adding to its inventory of disinfectants in response to the outbreak.
According to Argus, the company is also expanding distribution, increasing promotional spending and introducing new products, such as smaller and more profitable containers of Clorox bleach. The report also pointed out that management expects ad spending to increase to more than 10% of revenue and sees its promotional spending increasing over the rest of 2020. While higher marketing and promotional costs can hurt margins, Argus noted that the company’s stronger gross margins should partly offset impacts from the higher spending.
Back in early February, Clorox reported quarterly earnings of $1.46 per share, up from $1.40 from the prior year and 15 cents per share above consensus. The higher earnings primarily reflected gross margin expansion, even though Clorox’s revenue fell by 1.6% to $1.45 billion to still help it beat expectations by $20 million while its organic revenue was flat.
While Clorox may be most known for its namesake cleaning products, the company is diversified among cleaning, household and lifestyle products. Its cleaning segment is about 31% of sales, with the household segment generating 31% of revenue, followed by a 17% contribution to revenues from the lifestyle segment and 21% from international. The Argus report said:
The Cleaning segment, which includes laundry, home care, and professional products, saw 2Q sales rise slightly, to $501 million. Revenue topped the consensus estimate of $497 million. Pretax income rose 9% to $147 million. In the Household segment, which includes bags and wraps, charcoal, and cat litter, sales declined 8% to $360 million (in line with consensus) and pretax income fell 20% to $37 million. The sales and earnings declines reflected fewer sales of bags and wraps. The Lifestyle segment, which includes dressings and sauces, water filtration products, and natural personal care items, reported revenue of $347 million, up $12 million from the prior-year period and in line with consensus. … The International segment reported revenue of $241 million, down 2% from the prior-year period.
The report does mention some risks here. John Staszack, the analyst behind the call, said:
Clorox is exposed to international markets with a record of high inflation, such as Argentina and Venezuela. In addition, the International segment could be hurt by further currency devaluation in Venezuela or Argentina, which together account for one-third of Clorox’s international business… The company has substantial debt, and has ended the year with negative equity in four of the last five fiscal years. However, the deficit is affected by significant treasury stock. Although the dividend appears secure, the shares could sell off on any sign that the company might cut the payout to strengthen its balance sheet.
Despite a 6% drop of 185 points in the S&P 500 and a 1,700-point drop in the Dow Jones industrials, Clorox shares were last seen down only 0.75% at $172.05 in mid-morning trading on Monday. Its 52-week range is $144.12 to $177.32 and its Refinitiv consensus target price is $155.15. With an adjusted price of $152.52 for the 2019 close-out price, Clorox shares were up about 13% so far in 2020.