For the last five years, Clorox (CLX) investors have been cleaning up. In that time, the stock is up 89%. Clorox is trading at a 16-year valuation high. In my opinion, if you buy up here, you will get cleaned out.
Investors were excited after Clorox reported a strong first quarter. Organic sales jumped 6% and gross margins rose 220 basis points. The strong margins allowed Clorox to report earnings per share of $1.32, $0.14 ahead of the consensus estimate. Investors backed up the truck. The report drove the shares to hit a 52-week high of $132.
But when Clorox reported its second quarter on February 4, bulls were surprised the stock went down. Organic sales of 3% were less than expected, especially after the 6% jump in Q1, even though the company reported better-than-expected earnings per share.
Not only did Clorox miss on top-line organic sales, but every division also missed estimates. The Household segment reported organic sales growth of 1%, but investors wanted something closer to 5%. Cleaning was up just 2% versus expectations of 4% and Lifestyle up 2% vs 5%.
The earnings beat -- EPS came in at $1.14 versus expectations of $1.05 -- came through improvements in gross margins. Margins jumped 210 basis points, driven by strong pricing and falling commodity costs. Operating margin rose 250 basis points.
On the conference call afterwards, management raised guidance to a range of $4.75 to $4.90, versus the previous range of $4.68 to $4.83, but the consensus was at $4.89. Say what?
By essentially guiding in line with the consensus, management implied the rest of the year would slow. If you model it out, Clorox will report third-quarter revenue growth of just 1.3%. Growth would also slow to 0.4% for the fourth quarter. So for the year, the company will only produce 0.8% to 1% revenue growth.
On top of the second-half slowdown, gains from gross margins would have to come to an end. In the first half, Clorox squeezed out 429 basis points of added gross margin, which drove all those earnings beats. Most of that margin came from lower commodity costs. But, implied in management's guidance, the second half would only see a 40 bp increase. In other words, the gross margin expansion party is over.
In order to get earnings to grow 7%, with no help from second-half margins and virtually no revenue growth, the company has to buy back shares. And that's my problem with the stock. Clorox is at a 16-year valuation high. At $127, you're paying 26x fiscal 2016 estimates and something like 25x fiscal 2017 estimates of $5.22 for a company with virtually no revenue growth and a big slowdown (ahead) in margins.
Management told you gross margin expansion was coming to an end and the company faces tougher comparisons with 2014. Last year, in the third and fourth quarters organic sales grew 5% and 6%, respectively. The guidance implies Clorox won't be able to repeat last year's second half.
So, don't be surprised when the company reports a third-quarter EPS "blowout" on Apr. 28 with no revenue growth, and the stock drops in the after hours. Buying up here will get you cleaned out.
Check out our additional coverage of Clorox today by Real Money chartist Bruce Kamich.