(Bloomberg Opinion) -- Clorox bleach kills 99.9% of germs, and right now, it’s also beating 99% of stocks. While it probably doesn’t hurt to load up on disinfectants amid the outbreak of a potentially deadly virus, using the same logic to buy shares of the company may not be so prudent.
The chlorine-based liquid cleaner is getting a rare opportunity to shine, and unfortunately it’s due to the coronavirus scare. Shares of Clorox Co., which is best known for its bleach and disinfectant products, climbed 2.5% to an all-time high this week — and that’s as most of the S&P 500 index fell. In fact, Clorox’s gains have topped all but two other members of the U.S. market benchmark: Regeneron Pharmaceuticals Inc. and Gilead Sciences Inc. The two drugmakers are working to develop treatments to combat the illness. Until they do, bleach, it seems, may be one of our best hopes.
Clorox generates a third of its revenue from cleaning products for household and professional use, and 85% of its sales occur in the U.S. It’s hardly a fast-growing business, nor is it typical to see large fluctuations in demand, except for in the September quarter at the start of the regular flu season. Sales of Clorox’s cleaning products have held steady at $460 million to $570 million every quarter for the last four years, averaging $508 million over that span. Wet wipes aside, it’s a pretty dry business.
But the Centers for Disease Control and Prevention is warning that the same flu-like Covid-19 virus that crippled China’s Hubei province and is spreading globally could now threaten the U.S. If that’s the case, Clorox may be about to experience a surge in demand. “So far we’re not seeing an uptick,” Clorox CEO Benno Dorer said during the company’s earnings call Feb. 4, which was before the outbreak grew so severe that there was talk of a pandemic. But “we’re getting ready to be able to supply our customers and also our health-care institutional customers,” he said. It’s a part of the business Dorer knows intimately, having worked in the cleaning division for years before being named CEO in 2014.
The market clearly sees Clorox as a hot commodity. The only problem is that Clorox’s stock is already quite expensive, and it’s not like the sales boost from the coronavirus will be permanent.
Clorox trades at 26 times forward earnings, which is 13% higher than its average valuation over the past five years, according to data compiled by Bloomberg. Price-to-earnings ratios for all the consumer-products giants are elevated, but Colgate-Palmolive Inc., Kimberly-Clark Corp. and Procter & Gamble Co. are sill cheaper than Clorox on that metric.
Six analysts kept their “sell” ratings on the stock after Clorox’s latest earnings report earlier this month, which showed that two of the company’s other product lines — bags and charcoal — continued to prove troublesome. (Nine have a neutral rating, and only two recommend investors buy the shares.) Clorox had mistakenly raised the prices of its Glad trash bags last year to offset resin costs, but its competitors didn’t follow suit and so it lost market share and had to turn to promotions. The company also said that retailers have been devoting more space to alternative grilling fuels, an area that it’s beginning to move into as sales of its Kingsford charcoal decline; Clorox even renamed that division “grilling” to reflect the shift.
In normal times, when the entire planet isn’t raiding supermarket shelves for bleach disinfectant, Clorox’s growth has to come from demand that it creates by developing new versions of its products. When your main products are things like liquid pipe de-cloggers and grease removers, it’s hard to do much in the way of innovation. (Clorox also owns, somewhat randomly, Hidden Valley salad dressings and Burt’s Bees lip care.)
With this week’s coronavirus-induced market sell-off, investors are desperate to grab on to shares of the few companies that could stand to benefit from the outbreak. Clorox may play its own crucial role in combating the disease, but its stock is already overheated.
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Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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