Clorox vs Church & Dwight: Which Staples Stock Is A Better Pick?
The pandemic brought many companies in the consumer staples sector into focus as the demand for household goods, cleaning and hygiene products and packaged foods increased with people spending more time at their homes. During lockdowns, several consumer staples firms experienced high sales growth rates as consumers piled up food and groceries and other supplies. But the elevated growth rates have now moderated for several companies.
Recently, Clorox and Church & Dwight announced their results. Let us assess how these consumer staples have fared in recent months and use the TipRanks Stock Comparison tool to select the stock offering a better investment opportunity.
Clorox (CLX)
Clorox is continuing to enjoy robust demand for its cleaning products and other supplies amid the pandemic, unlike several peers which are experiencing moderation in their growth rates after the easing of lockdown restrictions. There has been a lot of emphasis on cleaning and hygiene to curb the coronavirus and Clorox is definitely benefiting from the elevated demand for hygiene products.
On Nov. 2, Clorox reported sales of $1.92 billion for the first quarter of fiscal 2021 (ended Sept. 30), which reflected a 27.2% year-over-over growth. The company’s 1Q FY21 sales growth accelerated compared to a 22% increase in 4Q FY20 sales. Also, 1Q EPS surged 103% Y/Y to $3.22 due to gross margin expansion and a one-time gain from the company's previously held investment in its Saudi joint venture.
Excluding the one-time gain, 1Q EPS grew 66%. Clorox’s cost savings efforts, higher volumes and favorable mix drove a 400 basis points expansion in the 1Q gross margin to 48%, marking eight consecutive quarters of higher gross margin.
The company’s cleaning business, especially its disinfecting products, is experiencing such strong demand due to the pandemic that its supply is still not fully meeting the elevated demand. Aside from its cleaning and disinfecting products, Clorox also experienced impressive sales growth for its food products (includes the Hidden Valley Ranch products), charcoal for grilling occasions, trash bags and water filtration products in 1Q FY21.
Due to this high demand, Clorox raised its FY21 guidance and now expects full-year sales growth in the range of 5% to 9% and EPS growth of 5% to 8%. However, it expects deceleration in the second half of FY21 due to tough comparisons with the same period in FY20, which saw initial demand spike at the onset of the pandemic.
Meanwhile, to capture the surge in demand, the company is exploring new growth channels. It has established strategic alliances with Uber, United Airlines, AMC Theaters and Cleveland Clinic to help these organizations follow cleaning protocols to curb the spread of COVID-19. (See CLX stock analysis on TipRanks)
The company continues to expand its product portfolio through innovative offerings like the compostable Clorox cleaning wipes and Glad ForceFlexPlus with Clorox trash bags (eliminate food and bacterial odors). Also, Clorox is ramping up its advertising spending (about 31% increase in 1Q FY21) to support its sales growth plans. It expects advertising expenses to account for 11% of FY21 sales.
Following the 1Q earnings release, Citi analyst Wendy Nicholson lowered the price target on Clorox stock to $238 from $246 and maintained a Hold rating on the expected deceleration in growth in the second half of FY21.
The Street is also sidelined on Clorox stock with a Hold analyst consensus based on 1 Buy and 4 Holds. With shares rising 38.3% year-to-date, the average analyst price target of $237.80 implies an upside potential of 12% in the stock.
Church & Dwight (CHD)
Church & Dwight makes an array of fabric care, home care, health and wellness and personal care products. It is mainly known for its Arm & Hammer brand, under which it sells baking soda and other products. Like several other companies that are into essential products, CHD is also experiencing strong sales due to pandemic-induced demand for its offerings.
Following a 10.6% growth in 2Q, CHD’s sales grew 13.9% to $1.24 billion in 3Q. The company stated that its brands experienced robust consumption in 3Q and it was experiencing similar strength in October. The pandemic drove double-digit growth in most of CHD’s domestic categories, mainly gummy vitamins, women’s hair removal products, cleaners and baking soda.
However, the company’s gross margin fell 110 basis points to 45.5% due to tariffs and higher manufacturing costs owing to outsourcing. Meanwhile, 3Q EPS grew 37.1% Y/Y to $0.85 but excluding a one-time gain, the growth was 6.1%.
CHD raised its outlook for 2020 following 3Q results and now anticipates 11% sales growth and adjusted EPS growth in the range of 13% to 14%. (See CHD stock analysis on TipRanks)
To boost its sales, CHD has rolled out several new products this year. Some of the innovations include new variants under the Vitafusion gummy vitamin line and Vitafusion Power Zinc and Elderberry Gummies. The company also launched Arm & Hammer Clean & Simple detergent, which has only six ingredients plus water, compared to 15 to 30 ingredients for typical liquid detergents.
Online channel growth is also an attractive growth prospect for the company, especially amid the pandemic. Online sales grew 77% in 3Q and the company expects e-commerce to account for 13% of its top-line this year.
Commenting on the decline in CHD shares following the recent results, Oppenheimer analyst Rupesh Parikh said, “The company is seeing a number of tailwinds that are expected to persist into next year such as with the health and wellness category. From following CHD over the years, we have found pullbacks to be short-lived. We believe this will again be the case. CHD remains a top pick for us, and we would buy the dip.” Parikh reiterated a Buy rating for CHD with a $100 price target.
The Street is cautiously optimistic about Church & Dwight with a Moderate Buy analyst consensus based on 3 Buys, 4 Holds and 1 Sell. The average analyst price target of $97.14 reflects a 9.2% upside potential in the coming months. Shares have advanced 26.6% year-to-date.
Conclusion
During challenging macro conditions, investors generally look toward consumer staples due to their defensive nature and consistent dividends. This year, Clorox hiked its quarterly dividend per share by 5% to $1.11 and it has a dividend yield of 2.06%. Church & Dwight hiked its quarterly dividend per share by 5.5% to $0.24 and has a dividend yield of 1.09%.
Clorox stock has outpaced Church & Dwight so far this year and still appears to be a better pick based on higher upside potential and a better dividend yield. However, the Street is currently sidelined on the stock due to valuation concerns.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
