Clorox (CLX) reported Q2 ’13 EPS this morning, a solid result of $0.90 ($0.03 gain in the quarter included in reported results) versus consensus of $0.81. We didn’t see much to do into the quarter, as our estimate was ahead of consensus. Our bias is to look to be short the name, as we view its multiple (18.6x ’13) as disproportionate to its long-term growth rate (3-5% top line). However, valuation isn’t a sufficient catalyst for us, so we will remain on the sidelines waiting for a clearer path to an EPS or top line miss is apparent. We may not have to wait long, depending upon how consensus shakes out for Q3.
The clear standout in the quarter was the company’s 7.1% constant currency organic top line growth (against a 4.1% in the year ago quarter). However, it appears that the number was flattered by:
- Early shipments (in Household, specifically charcoal)
- Robust flu season (disinfecting wipes – strong retailer buy-in, takeaway was very good as well, unclear what inventory status is) - not sustainable
- New products (bleach, lip care and dressings)
We should point out that the only segment that didn't have some sort of volume "noise" associated with it was International, which saw volumes decline 3 percent.
The upcoming quarter represents the most difficult year over year top line comparison (+5.9%) and will likely suffer from what flattered this quarter’s results. We will wait and see where consensus shakes out.
HEDGEYE RISK MANAGEMENT, LLC