Clorox (NYSE: CLX) is in the midst of a streak of several quarters of increasing sales. Demand for its cleaning products soared at the start of the pandemic when businesses and households prioritized surface disinfection.
Now, as its key market (the United States) turns the tide against the coronavirus with millions of people vaccinated daily, this increase in demand is potentially at risk. Still, the pandemic is not in sight, and even though the number of people testing positive for COVID-19 is declining, thousands of people are still falling ill every day.
Against that backdrop, here is the one key metric you should know when Clorox releases its third quarter fiscal 2021 results on Friday, April 30.
How fast is income growth slowing?
In reality, those who follow Clorox don’t expect revenues to grow at the rapid rate they have recently been. However, the question remains: how quickly will income decelerate from recent highs? The pandemic has resulted in increased sales, so the gains could be reversed eventually.
In the United States, where the company achieves 85% of overall sales, the trends in people infected, hospitalized and dead from COVID-19 are thankfully on the decline. Yet the number of people testing positive for COVID-19 remains stubbornly high. And even though continued vaccinations can drastically reduce that number, the likelihood of driving that number close to zero appears to be months or even years away.
Meanwhile, demand for Clorox cleaning and disinfection products may remain high. To put its recent outperformance into context, the company’s goal for long-term revenue growth is 2% to 4%. In the second quarter, revenue growth was 27%. To say this is significantly higher than the expected long-term trend is an understatement.
That being said, there is no guarantee that the United States will not experience another wave of infections. And as classrooms and businesses begin to bring students and employees back in person, it could lead to increased sales when schools and offices spend more on cleaning products. One reason why this is the most interesting metric you’ll want to know about in Q3 results is uncertainty about the revenue path.
What this could mean for investors
Wall Street analysts expect Clorox to report revenue of $ 1.87 billion and earnings per share of $ 1.48, which would represent an increase of 4.7% and a decrease of 21.7%, respectively, compared to the same quarter of last year. Even if the company met the revenue target, it would be a significant deceleration from the 27% revenue growth in the previous quarter.
Clorox will continue to find it difficult to increase sales for the remainder of the year. This is mainly because it compares the sales numbers for the current year with the quarters of 2020 when consumers and businesses stocked up on cleaning products.
As a result, shareholders will now need to be confident in management’s ability to control costs to drive earnings growth, as the demand surge may start to slow. Clorox has been successful in controlling costs over the past decade, while its operating profit margin has remained in the 16% to 19% range.
Clorox stock is trading at 22 times futures earnings, near the low end of its all-time range. If stocks pull back after the third quarter earnings release, it could be a buying opportunity for long-term investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.