Weakening Demand Could Weigh Clorox Stock Down To $150

Clorox stock (NYSE: CLX) is around the same level as its low in March 2020, but at the current price near $177 per share, we believe that Clorox stock has around 15% further potential downside.

Why is that? Our belief stems from the fact that Clorox stock is up around 12% so far in 2021, and after posting weak Q3 ’21 numbers, it’s clear that Clorox isn’t benefiting as much as it did at the peak of the pandemic. Our dashboard What Factors Drove 19% Change In Clorox Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Clorox stock’s rise since late-2017 came due to a 12% rise in revenues from $6 billion in FY2017 to $6.7 billion in FY2020 (Clorox’s fiscal year ends in June). Net margins rose from 11.7% to 14% over this period, and combined with a 3% drop in the outstanding share count, this helped EPS (earnings-per-share) rise from $5.43 to $7.46.

Clorox’s P/E (price-to-earnings) ratio dropped marginally between 2017 and 2020, and has since dropped further to 24x currently. However, given Clorox’s weak Q3 2021 results, there is further possible downside risk for Clorox’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus increased the need for sanitation and disinfectants, driving up demand for Clorox’s products. However, with widespread vaccinations and the economy opening up, demand for Clorox’s products might drop back to pre-pandemic levels. This is evident from Clorox’s Q3 2021 results where revenue came in unchanged at $1.78 billion. However, rising COGS and a $329 goodwill and asset impairment charge, saw pre-tax income drop to -$59 million from $297 million for the same period last year. Despite no income tax charge for Q3 2021, EPS came in at -$0.49, down significantly from $1.92 in Q3 2020.

We expect the demand for sanitation products to remain weak in the medium term, especially when compared to demand in 2020, at the peak of the pandemic. Additionally, if Clorox is unable to sustainably control expenses, this could drive down the company’s P/E multiple further, and we believe that Clorox stock can drop 15% from current levels, to around $150.

While Clorox stock may appear overvalued, it is helpful to know how its peers stack up. Clorox Stock Comparison With Peers summarizes how Clorox compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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