Wells Fargo Downgrades Clorox (CLX) Two-Notches to 'Underweight', Calls 'Dead Money' at Best

May 3, 2021 8:21 AM EDT
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Wells Fargo analyst Chris Carey downgrade the Clorox Company (NYSE: CLX) to “Underweight” from “Overweight” after the company slashed its 2022 guidance.

CLX stock closed over 3% lower last week after forecasting narrowing margins this year while revenues missed expectations. Quarterly sales came in at $1.78 billion to miss on the $1.86 billion projected by analysts.

“We’ll activate our long-standing cost savings program and ensure that we’re delivering that across our businesses. We’re looking at price increases, although we’re being very measured and taking that in a category-by-category approach and, of course, we’ll focus on innovation and margin-accretive innovation,” CEO Linda Rendle told CNBC.

“We’re focused on the long term. We’re going to manage through this tough cost environment, but we’re confident in our ability to accelerate long-term profitable growth.”

Rendle said CLX is on track to deliver a previous forecast for organic revenue growth of 10% to 13% this year. The company also said that earnings per share (EPS) will be in the range of $5.94 to $6.14 for this fiscal year.

The risk is clearly to the downside for CLX, says Carey.

“Dead money at best, with downside, in our view. We fought the good fight on CLX, arguing for a contrarian play with fundamental disconnects. The inflation spike in February made our prior thesis from December challenging, but with 4/30 earnings falling short on top-line and pricing plans muted, numbers need a significant reset, and there's just not much left for us to hold onto at the moment, in our view.”

“Our new FY22e EPS $7.20 is -10% vs Street, and we're not convinced that's low enough, with 'good' still factored in our model. With disappointing FY22 guidance well below Street potentially on the horizon, we're certainly not stubborn enough to keep, and indeed are compelled to change, our rating. We decrease our FY21/22e EPS to $7.55/$7.20 from $8.45/$8.35,” adds Carey.

A new price target of $170.00 per share (down from $240.00) reflects lower estimates.

“CLX delivered significant growth during the pandemic, and we believe there are opportunities to expand consumption of core cleaning products, including expansion of the Professional business with new customers and channels. For now, however, inflation headwinds are too great with offsets not enough, and we see risk to earnings,” Carey adds.

Clorox is down 1.5% in pre-open trading Monday.

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