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The one pandemic boom that is definitely over

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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Wednesday, August 4, 2021

Clorox shares erase all of their COVID gains

On March 11, 2020, the World Health Organization declared the spread of COVID-19 a global pandemic. 

In the days that followed, American consumers rapidly stockpiled supplies of all kinds — among them canned foods, toilet paper, and disinfecting wipes. 

And as the market has rotated through various stages of favoring "stay at home" trades or "re-opening" plays, it does seem that one part of the COVID boom has been severely discounted by investors: the COVID cleaning craze. 

At the close of trading on March 11, 2020, shares of Clorox (CLX) finished the day at $169.40. At the close of trade on Tuesday, one share of Clorox was worth $164.06, good for a 9.5% decline in one day of trading. 

Before the market open on Tuesday, Clorox reported results for its fiscal fourth quarter that disappointed investors, sending shares off by as much as 12%, a drop that was at one point the stock's largest single-day decline since 2000

"Fiscal year 2021 was an extraordinary year for Clorox, with the pandemic putting us through the test of volatility, including rapid changes in consumer demand and inflationary pressure, which is reflected in our fourth quarter results," CEO Linda Rendle said in the company's earnings release. 

Clorox reported sales declines in three of its four main segments, with the company attributing that "primarily to the deceleration of shipments from peak levels during the COVID-19 pandemic, including more rapid than expected deceleration in the Health and Wellness segment." 

The company also forecasted 2022 adjusted earnings per share would come in between $5.40-$5.70; in its just-completed fiscal 2021, Clorox earned $7.25 per share on an adjusted basis. 

And if we accept that stock prices are a reflection of investors' expectations for a company to generate future cash flows discounted back to the present, then what the market has ruled (as of Tuesday's close) is that the prospects for Clorox hardly look much brighter today than they did before the pandemic.

Compared to the stock's pre-pandemic valuation, however, investors are now paying a premium for Clorox shares, with the company forecasting a decline in sales and profits in the year ahead. 

With the midpoint of next year's adjusted earnings per share expected to fall at $5.55 per share, Clorox shares as of Tuesday's ended at around 29 times next year's earnings; after Clorox's earnings in February 2020, the stock traded at closer to 26 times that year's forecasted earnings of $6.18 per share

Of course, the Clorox story today is about more than just the end of a pandemic-induced "hygiene theater" that prompted people to wipe down every surface and doorknob we came across. 

Clorox management talked at length on its earnings call about what it called an "unprecedented cost environment in terms of inflation." CFO Kevin Jacobsen told analysts the company is expecting some $300 million of commodity and transportation related costs in the year ahead. 

And between dividends and buybacks, there are still opportunities for shareholder returns outside of stock price appreciation for Clorox investors. There's little doubt, however, that the future for Clorox appears more challenging than investors had anticipated. 

A theme we've discussed in The Morning Brief this earnings period is how companies are trying to tell investors where their business stands after a disruptive year across the business world. Comparisons to 2019 sales levels, for instance, have been a popular route for retail and restaurant brands. 

But sometimes all you can say is "unprecedented," "extraordinary," and "challenging." And then hope the market understands. 

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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