Clorox (NYSE: CLX) shares made a dramatic comeback in June, ending the month 11.9% higher according to data provided by S&P Global Market Intelligence and reversing a major chunk of the losses they'd piled on year to date.
Interestingly, Clorox shares have been on the rise ever since the company reported its third-quarter earnings early May despite a full-year earnings downgrade. What gives?
Rising cost pressure has been a common theme across the consumer goods industry. Clorox's third-quarter gross margin dropped to 42.8% from 44% as a result. Yet, the company earned 5% higher net profit year over year on lower taxes and 3% growth in sales. More importantly, Clorox upgraded its full-year sales guidance to the higher end of its previous range of 1%-3%. On the flip side, it downgraded its fiscal 2018 earnings per share (EPS) outlook to $6.15-$6.30 from $6.17-$6.37. There's nothing to worry here, though.
In March, Clorox announced plans to acquire health and wellness company, Nutranext for $700 million, to be financed through cash and debt. While Clorox expects the acquisition to add a percentage point to its top line this year (hence the revenue outlook upgrade), acquisition-related expenses are expected to dilute its earnings.
Investors were encouraged by Clorox's resilience amid challenging cost conditions. To top that, the company announced a share repurchase program worth $2 billion later in May, reflecting management's confidence in its long-term goals, which include 3%-5% growth in annual sales and conversion of 11%-13% annual revenue into free cash flows.
Rising cash flows should also mean higher dividends for shareholders: Clorox has already made a mark in the dividend world as a Dividend Aristocrat and rewarded shareholders with a good 14% increase in dividends earlier this year.
Clorox's full-year outlook, after the downgrade, calls for a solid 16% growth in EPS at the midpoint. While the Nutranext acquisition is unlikely to be accretive before fiscal 2020, Clorox should still be able to grow its EPS at a decent clip next year. The growth potential in earnings and dividend, coupled with the buyback program, was good enough for the market to propel Clorox shares higher last month.
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