The Clorox Company (NYSE:CLX) is one of the key players in the FMCG sector, focusing on cleaning and home care products. The Company operates in 25 territories and sells its products in 100 markets. Around 80% of its sales are generated through the brands that hold leading or second-to-leading positions in their respective niches. Like its competitors, CLX sells its products mainly to retailers operating broad brick-and-mortar retail chains and online stores. Please find CLX’s overview of its brands presented in its latest 10-K below.
Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach, cleaning and disinfecting products; Pine-Sol and Tilex cleaners; Liquid-Plumr clog removers; Poett home care products; Glad bags and wraps; Fresh Step cat litter; Kingsford grilling products; Hidden Valley dressings, dips, seasonings and sauces; Brita water-filtration products; Burt’s Bees natural personal care products; and Natural Vitality , RenewLife , NeoCell and Rainbow Light vitamins, minerals and supplements.
Let’s examine Clorox’s recent performance and valuation and compare it to its peers. Enjoy the read!
CLX Underperforms Business-Wise
Poor performance in terms of business scale
The Company’s revenue is well-diversified across its reportable segments:
- Health and Wellness (36% of sales)
- Household (28% of sales)
- Lifestyle (19%)
- International (17%)
However, each of these segments experienced sales contraction, which resulted in an overall performance of 4% decrease in CLX’s sales, driven through:
- a negative organic volume effect of 5%
- a positive price/mix effect of 5%
- a negative FX fluctuation of 3%
- a negative volume effect resulting from divestitures of 1%
Please review the chart below (depicting CLX’s sales growth decomposition in FY 2024 vs FY 2023) for details.
Author based on CLX
To provide you with a reference point, let me refer to some of the other key FMCG players:
- Procter & Gamble (PG)
- Colgate-Palmolive (CL)
- Kimberly-Clark (KMB)
Please note that I’m comparing different periods due to the differences in fiscal periods assumed by each company. PG’s fiscal year aligns with CLX’s, while CL’s and KMB’s fiscal years align with calendar years. Nevertheless, each of the businesses mentioned above outperformed CLX regarding revenue changes. For instance:
- PG recorded 2% growth in FY 2024 vs FY 2023, driven primarily by a positive pricing effect (offset by FX)
- CL recorded 5.5% growth in Q1-Q2 2024 vs Q1-Q2 2023 through its outstanding positive volume and pricing effect (offset by FX)
- KMB didn’t provide growth, but the magnitude of its revenue decrease is noticeably lower than CLX’s, as it has recorded a decrease of ‘just’ 1%
Please review the charts below for details.
Author based on PG, CL, and KMB
As I mentioned, CLX’s reportable segments performed poorly and recorded revenue decreases in FY 2024. Even more concerning, each US segment (each segment except International) recorded substantial negative volume changes, and CLX’s pricing policy wasn’t nearly enough to offset that. Please review the table below for details.
Author based on CLX
Profitability – Clorox makes less dollars than its peers
The scale of a business is one thing, but the matter of how much profit remains within a company from all the revenue it generates is another. It’s crucial, as the most successful businesses reflect their competitive edge by upholding better profitability than their peers. This is evident in the case of Microsoft (MSFT), Coca-Cola (KO), Apple (AAPL), and many others.
Unfortunately, that’s not the case for Clorox, which is a major drawback from my perspective. It substantially limits the Company’s ability to reward shareholders and improve its market position.
Without further ado, please review the gross margin and adj. EBITDA margin calculations for Clorox and some of its peers are depicted in the charts below.
Please note that I included Net sales, Cost of goods sold, SG&A expenses, and other expenses in the Operating Income calculation, then adjusted for depreciation and amortization costs to get EBITDA. I also adjusted the EBITDA margin for impairment charges for intangible assets and other ‘one-off’ items such as divestiture costs.
Author based on CLX, PG, CL, and KMB
As we can see, CLX’s business is not well-optimized. It generates a gross margin noticeably below the levels of PG and CL. Moreover, despite a higher gross margin than KMB, it looks poorly regarding adj. EBITDA margin across the whole reference group.
Given the above factors, I’d expect a noticeable valuation discount, but I was surprised to see that…
Valuation Outlook – Is CLX Fairly Valued?
As an M&A advisor, I usually rely on a multiple valuation method that is a leading tool in transaction processes, as it allows for accessible and market-driven benchmarking.
With that said, the forward-looking EV/EBITDA multiple stood at:
- 16.6x for CLX
- 13.6x for KMB
- 17.8x for PG
- 18.9x for CL
Given the underperformance in revenue growth and evident competitive disadvantage in profitability, I don’t consider its EV/EBITDA multiple justified. Yes, it trades below the levels of PG or CL, but both of these companies record top-tier metrics in the sector, showcasing not only noticeably growing business scale but also outstanding profitability. On the other hand, KMB records higher adj. EBITDA margins and better performance regarding revenue growth, but it trades substantially below CLX.
That leads me to the conclusion that CLX is overvalued.
Investment Thesis and How To Apply It
Regardless of the performance, businesses of such scale operating within a highly resilient and stable market don’t disappear overnight. Therefore, CLX may still be worth holding for some investors, especially those who have secured better entry points, i.e., better yield on cost. Under such an assumption, I would hold onto CLX. Especially given CLX’s dividend track record and solid DPS growth delivered over the years. There are surely some investors who are now happy with yield on cost they secured back in the day.
CLX
However, I would not consider it a ‘buy’ at this valuation and performance. Also, I’d advise investors who have recently gotten involved in the Company to consider relocating to other FMCG players, such as those mentioned earlier, which offer a better risk-to-reward ratio. For that reason, I consider CLX a ‘sell’. For transparency, I don’t have and will not initiate a short position. I don’t have any shares of CLX and don’t intend to acquire any.
To put it frankly, I believe that CLX investors will witness its multiple contraction and the gap between CLX’s and KMB’s EV/EBITDA multiples to widen. Therefore, I am bearish on CLX and consider it a ‘sell’, as there are better-performing businesses in the sector.
