CLX reported Q3 ’13 EPS $0.05 below consensus along with “meh” constant currency sales growth of 1.6%. Despite the miss, the company maintained full-year EPS guidance of $4.25 to $4.30 while shaving 1 pt off its sales growth forecast. The company also provided an initial look at 2014 – EPS of $4.55 to $4.70 (consensus is already at $4.69, so 7.5% EPS growth at the midpoint of both guidance ranges).
With the stock down just 64 bps on this news, it feels as if we are taking crazy pills.
We have a 2% top line growth asset that just told investors that it is an 8% EPS grower trading at 18.2x calendar ’14 numbers. We just don’t get it. We understand low volatility and the continued yield chase that we are seeing in the market, but CLX is fast becoming Exhibit A in the absurdity of staples valuations.
What we liked:
- ’13 continues to be a very good year for FCF - $2.66 per year in FCF versus $1.62 per share in the same 9 month period in ‘12
- Balance sheet remains tight – accounts receivable and inventories +0.9% and 0.0% year over year, respectively
- Increased advertising as a % of sales 35 bps versus 2012
- Costs are well controlled – SG&A as a percent of sales declined 119 bps year over year
What we didn’t like:
- Missed consensus (EPS of $1.00 versus consensus of $1.05)
- +1.6% constant currency organic sales growth (against admittedly the most difficult comparison of fiscal 2012). However, the 1.6% print is likely within the company’s long-term sustainable growth profile.
- EBIT declined in every segment in the quarter
- Gross margin declined 50 bps
- Valuation is absurd
Bottom line, god speed to the machines and whomever else thinks it’s worth adding to CLX at these levels – at some point, you are going to need all the luck you can get.
Call with questions,
HEDGEYE RISK MANAGEMENT, LLC