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Why Clorox Will Thrive Beyond Covid-19

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- By Panos Mourdoukoutas

The decline of the Covid-19 pandemic could ease the short-term demand spike for Clorox Co. (CLX) cleaning and disinfecting products, which will likely cause a drop in the stock price. However, I do not believe this will hurt the longer-term run-up in either demand for the company's products or its share prices.


Over the past year, Clorox has been in the right market segment of the consumer industry at the right time: cleaning and disinfecting products. Business is so good that the company is striving to catch up with demand by adding capacity and hiring third-party manufacturers.

Over the last twelve months, the company has reported earnings that beat analyst estimates (see table below).

Fiscal Quarter End

Date Reported

Earnings per share ($)

Consensus EPS ($)

%Surprise

Dec 2020

02/04/2021

2.03

1.73

17.34

Sep 2020

11/02/2020

3.22

2.34

37.61

Jun 2020

08/03/2020

2.41

2

20.5

Mar2020

05/01/2020

1.89

1.72

9.99



Wall Street has taken notice, making Clorox's stock a big winner among "pandemic stocks." However, in the last three months, investors sold off the company's shares, as they expect sales of cleaning and disinfecting products to taper off once new Covid-19 cases slow and both companies and consumers stop usuing as many cleaning and disinfecting products.

Still, in my opinion, both Clorox the company and Clorox the stock are in a position to prosper beyond the pandemic for several reasons.

One of them is that the company manufactures and distributes products with inelastic demand. Outside of pandemic conditions, demand for its offerings tends to remain highly consistent.

Then there's Clorox's ability to deliver steady growth through "creative destruction," i.e. the merciless cutting of any underperforming segments. This process that has helped the company transform from a bleach manufacturer more than a century ago to a diversified consumer and wellness products company today.

Steady growth has helped Clorox enhance shareholder value nicely, delivering better returns to its stockholders than Procter & Gamble (PG) (P&G acquired Clorox briefly back in the 1950s but was forced by regulators to divest it).

Additonally, the company's growth is profitable, as shown by its high economic profit. The return on invested capital capital (ROIC) is higher than the weighted average cost of capital (WACC), indiciating the company is creating value for shareholders.

Company

ROIC

WACC

Economic Profit

Clorox

21.65%

2.57%

20%

P&G

13.73

3.87

9.86



Clorox's economic profit has been trending higher over time, from around 10% a decade ago to 20% recently, implying that it becomes more effective in managing capital as it grows.

The bottom line for me is that Clorox management has been doing an excellent job allocating capital and was prospering before the Covid-19 pandemic. I think it will continue to thrive long after, despite the short-term factors that turned it into a trendy stock.

Disclosure: I own shares of Clorox and Procter & Gamble

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This article first appeared on GuruFocus.