One part of the COVID boom has been discounted by investors

One part of the COVID boom has been discounted by investors

This article appeared first in the Morning Brief. Clorox stocks are wiped out of their COVID gains.

On April 11, 2020 the World Health Organization declared COVID - 19 a pandemic worldwide.

In the days to follow, American consumers quickly stockpiled supplies of all kinds — among which canned foods, toilet paper and sanitary wipes.

And as the market has rotated through various stages of voting stay at home trades or re-opening plays, it does seem that one part of COVID boom has been extensively discounted by investors: the COVID cleaning craze.

At the close of trading on March 11, 2022, shares of Clorox ended the day at $169.40. At the closing of trade on Tuesday, one share of Clorox was worth $164.06, a 95% decline in one day of trading.

Before the market opened on Tuesday, Clorox reported results for its fiscal fourth quarter that disappointed investors, sending shares off as much as 12%, a drop which was the stock's largest single-day decline since 2000 at one time.

Fiscal year 2021 was an extraordinary year for Clorox, with the pandemic putting us through the test of volatility, including rapid changes in consumer demand and inflationary pressure, which is reflected in our fourth quarter results, CEO Linda Rendle said in the company's earnings release.

Clorox reported sales declines in three of its four main segments, with the company attributing that primarily to the deceleration from peak levels during COVID 19 pandemic, including more rapid than expected deceleration in the Health and Wellness segment.

The company also forecasted 2022 adjusted earnings per share between $5.40 - $5.70; Clorox earned $7.25 on adjusted basis in its just-completed fiscal 2021.

If the prices of shares reflect investors' expectations for a company to generate future cash flows discounted back to present, then what the market has ruled is that the prospects for Clorox look much brighter today than they did before the pandemic.

Compared to the stock's valuation pre-pandemic, however, investors are now paying a premium for Clorox shares, with the company forecasting a decline in sales and profits in the year ahead.

Clorox shares traded with the midpoint of next year's adjusted earnings per share expected to fall at $5.55 per share as of Tuesday's trading at around 29 times next year's earnings; after Clorox's earnings in February 2020, the stock traded closer to 26 times that year's forecasted earnings of $6.18 per share.

Of course, the Clorox story today is about more than just the end of a pandemic-induced hygiene theater that prompted people to wipe everything we found or touched down.

Clorox management talked at length on its earnings call about what it called an unprecedented cost environment in terms of inflation. CFO Kevin Jacobsen told analysts the company is expecting some $300 million of commodity and transportation related costs in the year ahead.

And for some investors as a Clorox investor, there is the possibility for shareholder returns outside of the stock price appreciation. However, there's no doubt that the future of Clorox appeared more challenging than investors had anticipated.

A theme we've discussed in the Morning Brief this earnings period is how companies are trying to tell investors where their business stands after a disruptive year across the business world. Comparisons to 2019 sales levels, for instance, have been a popular route for retail and restaurant brands.

But sometimes all you can say is extraordinary, unexpected, and challenging. And then hope the market understands.

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