Clorox bucked the headwinds of intense competition and slowing global growth with its quarterly results.
By Erin Lash, CFA | 02-03-17 | 04:00 PM | Email Article

 Clorox bucked the headwinds of intense competition and slowing global growth that have plagued its peers, posting solid organic sales (up 6% driven entirely by higher volumes), 10 basis points of gross margin expansion to 44.7%, and 80 basis points of operating margin gains to 19.3%. In our view, Clorox’s focus on launching innovative products and marketing this fare to consumers (spending $600 million annually, or 11% of sales) make it a valued partner for retailers, solidifying its wide moat. In this vein, management indicated that premium innovations (such as value-added trash bags with OdorShield) are driving top-line and profit gains, and are winning out at the expense of baseline offerings. This supports our contention that consumers will opt to pay up when they see added value.

Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.

Management took down the top end of its fiscal 2017 adjusted earnings range to $5.23-$5.38 per share from $5.23-$5.43 previously to reflect a slightly lower benefit from accounting for share-based compensation. But we don’t anticipate changing our estimate of $5.27 per share, which still falls in the company’s updated range. In addition, our long-term outlook (around 4% annual sales growth--with about 60% of the growth driven by higher volume, with the remainder resulting from increased prices and favorable mix--and operating margins expanding to just north of 19%, 150 basis points above the five-year average) remains in place.

We’re maintaining our $119 fair value estimate, excluding the benefit from the time value of money. With the mid-single-digit uptick in the shares, though, we view the stock as a bit elevated, trading at a 6% premium to our valuation. As such, we’d suggest investors await a more attractive entry point before building a position. For investors looking to garner a foothold in the space, we’d suggest wide-moat Colgate (which is trading at more than a 10% discount to our $74 fair value estimate) as a more attractive option.

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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