Dealing With Clorox's Messy Quarter

On Wednesday, Clorox (CLX) reported a messy quarter. Earnings fell well short of analyst estimates, but revenue topped forecasts.

I would avoid Clorox for the time being.

Its first-quarter fiscal 2017 earnings were $1.36 per share, 6 cents below the consensus estimate. Revenue rose 3.8% to $1.44 billion, slightly higher than the $1.43 billion estimate.

On the conference call afterwards, management lowered guidance. The company said it expects 2017 earnings to fall between $5.23 and $5.43 per share, vs. the previous guidance of $5.38 to $5.80. The lower earnings estimate reflects a higher tax rate. The company is now looking for a 32% to 33% tax rate vs. 30% to 31%.

Revenue guidance was unchanged. The company forecast revenue growth of 2% to 4% to $5.88 billion to $6.0 billion.

Volume growth of 8% was offset by a negative 4% price/mix. Gross margins were down 60 basis points, while selling, general and administrative expenses rose 50 basis points. Operating margins declined 110 basis points, which caused operating profits to come in 3% less than expected.

In terms of business segments, the cleaning segment delivered 13% volume growth, but price completion and product mix took 6% out of the results. Household volume was up 6%, but price/mix took 3% out of the segment. The Renew Life division, which was acquired in May, was up 2%.

While volumes are strong, price competition is hurting gross margins and preventing the company from growing earnings as fast as investors would like.

It's likely next quarter will be more of the same. Analysts are looking for sales to grow about 4% to $1.4 billion. Assuming operating margins can get over 18%, earnings are estimated to be up 5%.

For the year, revenue should be $5.9 billion, up 3.5%. Clorox is expected to deliver earnings of $5.30 per share, up nearly 8%.

To get to the year-end estimates, earning per share need to grow over 8% in the third quarter and 14% in the fourth quarter, which, I think is unrealistic. Earnings have been under pressure for the last three quarters because of pricing. In order to gain market share, competitors have been slashing prices and that has hurt gross margins as Clorox is forced to lower prices.

Right now, the consumer products companies seem to be out of favor with investors. With fiscal 2017 earnings estimates of $5.30, the shares are trading at 21.8 times estimates. That's a rich valuation for a company with low-single-digit revenue growth.

I would avoid shares of Clorox based on its high valuation and lackluster earnings growth. If price competition were to let up and operating margins jumped, I could see getting back in, but for now, I am staying away from Clorox. I see more messy quarters ahead.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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