Household Giant Meaningfully Discounted by Cyclical Headwinds

Thesis Statement

The market has discounted Clorox due to the multitude of headwinds the company has faced recently; covid pressures, rampant inflation, and a cyberattack in August 2023 all represent transitory pressures rather than deterioration of the core business model. Clorox has maintained a strong FCF position, FCFF as a percentage of sales has averaged 12% over the past five years, complemented by gross and operating margins having recovered from covid and inflationary headwinds. Continued gross margin recovery is unlocked by the completed Enterprise Resource Planning (ERP), and the integration of GOJO industries.

Market dislocation

Clorox has withstood covid pressures, inflation, an August 2023 cybersecurity attack, and increased competition within the market that the stock hasn't fully recovered from. Current P/E sits at 15.41x compared to a five year trailing P/E of 56.32x and forward P/E of 15.34x. EV/EBITDA remains discounted, at 11.61x compared to a five year average of 26.46x. Though the stock has been beaten down by headwinds, the company has maintained significant core business profitability. Gross margins have remained steady in the mid-40’s, while net profit expansion has led to an increase from a 5.68% average profit margin (2021-2024) to 11.60% and 11.39% in FY25 and TTM respectively. Clorox’s step-up in industry wide promotional spending coupled with synergies acquired from the acquisition of GOJO industries and implementation of ERP should allow for Clorox to rerate closer to its historical valuation multiples.

Valuation

Clorox is already seeing healthy recoveries in ROA, ROIC and ROCE, sitting at 13.97%, 23.38%, and 32.99%, all well above five-year historical averages. This represents the normalization of supply chain overhead and freight inflation from COVID. FCFF as a percentage of sales has averaged 12% over the past five years, however, Clorox saw a recent decrease in its cash position due to the acquisition of GOJO. Clorox saw a 4.84% decrease in total revenue growth (TTM), representative of weakened U.S. consumer sentiment. Despite that, international revenue growth saw a 3.38% increase, showing that brand strength remains strong worldwide. EV/EBITDA sits at 11.61x, compared to a five year average of 23.44x, showing that core profitability sits intact, while price has remained beaten down by sentiment. This low multiple provides a strong valuation floor, providing a high margin of safety for a longer time horizon. Morningstar assigns a fair value rating of $163, which is well above general consensus. Fair value for the stock with Morningstar and expert consensus both considered implies an adjusted fair value of $130 when weighted against expert consensus.

Business Quality

With one of the most recognizable name brands, Clorox maintains strong business quality with a wide economic moat. Clorox maintains significant market share, maintaining 63% market share in the North American bleach aisle, controls 41% of the domestic toilet care industry, and maintains strong market share within charcoal, commanding up to an 80% market share. Clorox maintains very strong relationships with retailers, developing benefits revolving around economies of scale, and logistical efficiencies. The ERP upgrade that Clorox has been implementing for around five years is situated to deliver improved efficiencies, which will be complemented by the acquisition of GOJO. Clorox maintains significant cost advantages over competitors and private labels, providing a buffer to the competition that Clorox faces with increased competition of private label names. Normalizing for goodwill, net debt/EBITDA has remained steady at around 2x over the past five years, showing leverage isn't a concern.

Sell triggers

Continued decreases in YoY revenue growth coupled with gross margins compressing below 40%, or organic growth seeing two quarters of declines will trigger a sell. Resizing will be triggered when the stock reaches the $130 fair value mark, where half of the position will be trimmed, then a full exit at 120% of FV.