Resilient Innovation And Calculated Divestitures Boost Future Growth In A Competitive Market

Key Takeaways

• Supply chain restoration post-cyber attack is expected to drive market share recovery and future revenue growth.
  
• Divestment and international market growth strategies aim to stabilize earnings and diversify revenue streams.
  
• Heavy reliance on promotions and innovation over pricing may erode margins and earnings amidst a competitive environment and uncertain macro conditions.

Catalysts

Engages in the manufacture and marketing of consumer and professional products worldwide.

• Clorox has fully restored its supply chain, addressing disruptions from the August 2023 cyber attack, which is expected to contribute positively to market share recovery and drive future revenue growth.
  
• Significant progress in gross margin expansion with a focus on returning to pre-pandemic gross margins highlights improved operational efficiencies, which can positively impact net margins and earnings.
  
• The divestment of the VMS business and the Argentina operations supports Clorox's strategy to reduce volatility, focusing on more consistent revenue streams and improving overall earnings stability.
  
• Investments in advertising and innovation are aimed at enhancing brand value and capturing consumer demand, which are expected to drive volume growth and contribute to sustained revenue increases.
  
• Strong performance and growth expectations in international markets, along with Clorox Professional products, indicate diversified revenue streams contributing positively to the overall business, aiding revenue and earnings growth.

Clorox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Clorox's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $936.7 million (and earnings per share of $7.51) by about November 2027, up from $357.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.6x on those 2027 earnings, down from 57.3x today. This future PE is greater than the current PE for the US Household Products industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Clorox Future Earnings Per Share Growth

Risks

• The uncertain macro environment and pressure on consumers to seek value may lead to decreased revenue as consumers potentially trade down or delay purchases of Clorox products.
  
• Increased promotional activity, especially in categories like Litter, could erode net margins if the costs associated with promotions do not lead to sustained volume growth or market share retention.
  
• The reliance on innovation and promotional spending to drive volume growth instead of pricing actions may place pressure on net margins and long-term earnings if these strategies don't yield the anticipated return.
  
• The divestitures of lower-margin businesses, while potentially beneficial to gross margins, could also result in foregone revenue if those segments were contributing positively to top-line growth.
  
• The competitive promotional environment in product categories like Litter could lead to a prisoner's dilemma, where heavy promotional spending by all players erodes profitability without achieving significant gains in market share, impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $162.85 for Clorox based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $188.0, and the most bearish reporting a price target of just $139.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.6 billion, earnings will come to $936.7 million, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $165.36, the analyst's price target of $162.85 is 1.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.