Clorox (NYSE:CLX) is on the move. Clorox stock has gained 35% so far this year. Excepting a brief rally back in March, shares now trade at an all-time high.
The short-term case for Clorox stock is relatively obvious. As the country, and the world, deal with the spread of the novel coronavirus, the use of disinfectants is going to rise. Clorox and Lysol owner Reckitt Benckiser (OTCMKTS:RBGLY) should be the two biggest beneficiaries.
But there’s a long-term case as well. And the company’s fiscal third-quarter report on May 1 highlights that case. CLX stock has broken out since the release — and I don’t believe that breakout is ending just yet.
Strong Earnings
Expectations were high for Clorox’s Q3 report — but the company handily exceeded those expectations. Simply put, it was a blowout quarter.
Revenue increased 15% year-over-year. Gross margins expanded by more than three percentage points, helping drive a 31% jump in earnings per share.
It’s tempting to chalk up the gains solely to the pandemic. And no doubt that helped. But bear in mind that Clorox’s third quarter ended March 31.
So the short-term boost is going to be even more significant when Clorox gets a full quarter behind it. And, again, there’s a long-term aspect to the growth as well.
The Mid-Term Case
Clorox might seem like more of a short-term play on the pandemic response. It would appear more like personal protective equipment manufacturers Lakeland Industries (NASDAQ:LAKE) or Alpha Pro Tech (NYSEMKT:APT).
There will be a quick boost to profits as the new virus peaks. But that boost will fade. The country, and the world, will return to normalcy. So will Clorox’s results.
But I actually see Clorox stock as something more like Zoom Video Communications (NASDAQ:ZM) or Costco (NASDAQ:COST). The short-term boost changes the mid- to longer-term outlook.
After all, Clorox has faced some pressures in recent years. Price increases didn’t hold. Clorox had to deal with the same private-label competition faced by the likes of Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and food manufacturers.
Meanwhile, many consumers, particularly in higher-income brackets, turned to “natural” alternatives they saw as safer than bleach.
I expect that will change. To be sure, during this crisis, even at market lows, I’ve reiterated my belief that the economy and the market will bounce back.
But life will be different in some ways. It has to be. As a society, we’ll no doubt be more mindful of how viruses spread.
Lemon juice and vinegar aren’t going to cut it. Natural isn’t good enough. Consumers are going to want the hard stuff.
And so, like Zoom or Costco, Clorox is picking up customers in the short term that almost certainly are going to stick around for the long haul. The best news from earnings is just how many of those new, and recaptured, customers Clorox added in a matter of weeks.
Valuation Concerns for Clorox Stock
To be sure, Clorox stock is pricing in some of that good news. Again, shares have rallied 35% so far this year. They’ve gained 11% in the two weeks since earnings.
And CLX isn’t cheap. The stock trades at about 30x this year’s earnings.
But this is a defensive, growing business. Investors will and should pay up for that kind of company. There simply aren’t that many out there.
More broadly, in the recent bull market and in this recovery, investors have done well to focus on the best businesses. Cheap stocks can look attractive — but they generally stay cheap.
As Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett famously put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Clorox is a wonderful company. The price is fair. The spike in demand isn’t going to suddenly end this summer. And so I believe the breakout in CLX is going to continue.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
