Should Passive Income Investors Buy Clorox Stock? | CLX Stock

SUMMARY

Parkev Tatevosian, CFA, examines Clorox's recent financial challenges, including the impact of inflation, geopolitical events, and pandemic-related disruptions. Despite these headwinds, he concludes that Clorox's current valuation offers a potential buying opportunity for passive income investors.

MAIN POINTS

• Clorox projects inflation-driven costs exceeding $200 million for fiscal 2027, more than double its historical range, and forecasts flat to modest sales growth. [0:00]
• The pandemic caused a dramatic spike in Clorox's revenue, disrupting its historically stable, low-growth business model. [1:00]
• Clorox's management response to the pandemic is rated as below average, with increased costs and only a slight margin boost during peak demand. [2:01]
• Post-pandemic, Clorox's operating margins fell sharply as demand normalized and new external pressures, such as tariffs and the war in Iran, emerged. [3:00]
• Clorox's valuation has declined, trading at a forward P/E of 17, and its intrinsic value is calculated at $104 per share, suggesting a 33% upside. [4:00]
• Despite ongoing macroeconomic challenges, Clorox is considered a buying opportunity for investors willing to dollar cost average through the current fiscal year. [6:00]

DETAILED ANALYSIS

Clorox is currently navigating a series of significant macroeconomic and geopolitical headwinds, most notably the inflationary pressures exacerbated by the war in Iran. The company anticipates inflation-related costs to surpass $200 million in fiscal 2027, which is more than double its typical historical range. Management's outlook for the near term is cautious, projecting flat to slightly positive sales growth, reflecting the challenging environment.

Historically, Clorox has been a stable, low-volatility business, growing in the low single digits and largely unaffected by broader economic shifts. However, the onset of the COVID-19 pandemic in 2020 dramatically altered this pattern, causing a surge in demand for cleaning products and driving revenues from $6.4 billion to nearly $9 billion in a short period. This demand spike was difficult to manage, and while some companies like Home Depot and Amazon adapted effectively, Clorox's response is assessed as middle to below average, with increased costs and only a modest improvement in profit margins.

Following the pandemic, Clorox struggled to adjust its cost structure as demand for its products normalized. The company faced additional challenges from tariffs and ongoing geopolitical tensions, which further pressured margins. Operating profit margins, which had briefly risen to around 22% during the pandemic, fell back to approximately 10% as the company grappled with elevated costs and fluctuating demand.

These disruptions have weighed on the stock's valuation, with Clorox now trading at a forward price-to-earnings ratio of 17, near the lower end of its historical range since mid-2023. A discounted cash flow analysis places the intrinsic value of Clorox shares at $104, compared to a current market price of $106, indicating a potential 33% upside over the next 12 to 18 months. Despite the lack of immediate catalysts for a price rebound, Clorox is viewed as a buying opportunity for passive income investors willing to dollar cost average through ongoing headwinds, with the possibility of a positive shift if geopolitical tensions ease.

LINKS

• YouTube channel membership for early access, spreadsheets, and Discord community.
• Special offer for The Motley Fool Stock Advisor.
• Parkev Tatevosian's book on a 6-step investing framework.
• Fiscal.ai investment research platform with a viewer discount.
• Webull investing platform with bonus shares offer.
• Subscription link for Parkev Tatevosian's free monthly Substack newsletter.

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