Can Clorox (CLX) Retain Earnings Beat Trend Despite All Odds?

The Clorox Company (NYSE:CLX) is slated to report second-quarter fiscal 2019 results on Oct 31. A glimpse of the company’s earnings performance shows that it delivered positive surprise in the trailing eight quarters. It recorded average positive earnings surprise of 3.3% in the last four quarters.

The Zacks Consensus Estimate for earnings in the fiscal second quarter is pegged at $1.32, which reflects growth of 7.3% year over year. Earnings estimates remained unchanged in the last 30 days. Let’s see how things are shaping prior to the earnings announcement.

Factors at Play

Clorox has been gaining from solid growth initiatives — including 2020 Strategy, Go Lean Strategy, enhancement of e-commerce business and disciplined capital allocation. The company’s 2020 Strategy, which is aimed at improving categories and boosting overall market share, is well on track. This strategy targets net sales growth of 3-5%, increasing EBIT margin by 25-50 basis points (bps) and generating free cash flow of 10-12% of sales, all on a yearly basis.

Further, the company’s Go Lean Strategy is likely to boost margins through operational efficiencies. Moreover, it remains committed to investing in product and brand differentiation in order to safeguard value proposition. Additionally, Clorox’s focus on solid investments in demand building through digital marketing, e-commerce and product innovation pipeline is encouraging.

Notably, these actions have been aiding the company’s quarterly results, which is clear from the robust surprise trend over the past few quarters. Furthermore, it delivered sales beat in four of the trailing six quarters. The Zacks Consensus Estimate for revenues in the fiscal second quarter is $1.48 billion, mirroring a 4.4% increase from the year-ago quarter.

Backed by these positives, shares of Clorox have rallied 9.7% in the past six months, outperforming the industry’s 4.8% growth.

Despite gains from cost-saving and productivity initiatives, the company continues to witness significant pressure on gross margin, owing to elevated commodity, manufacturing and logistics expenses. This remains a major concern in the to-be-reported quarter as clear from its guidance. Though management expects gross margin expansion in the second half of fiscal 2019, gross margin is likely to remain soft in the first half, owing to higher costs.

For fiscal 2019, the company estimates gross margin to be flat as gains from higher prices and cost-savings efforts are expected to be offset by increased costs, and adverse foreign currency exchange rates. Additionally, the company lowered earnings projections for fiscal 2019 due to expectations of making fewer share repurchases in fiscal 2019 than nearly 50% of the $2-billion share repurchase authorization mentioned earlier. Adverse impacts from foreign currency and higher costs also hurt the earnings forecast.

Consequently, management anticipates earnings per share from continuing operations to be $6.20-$6.40 in fiscal 2019.

What the Zacks Model Predicts

Our proven model does not conclusively show that Clorox is likely to beat earnings estimates in second-quarter fiscal 2019. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Clorox currently carries a Zacks Rank #3. However, the company’s Earnings ESP of -1.14% lowers the chances of earnings beat in the upcoming release.

Stocks With Favorable Combination

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Archer Daniels Midland Company (NYSE:ADM) has an Earnings ESP of +2.45% and it currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Church & Dwight Co. Inc. (NYSE:CHD) has an Earnings ESP of +2.80% and a Zacks Rank #2.

Monster Beverage Corporation (NASDAQ:MNST) has an Earnings ESP of +0.31% and carries a Zacks Rank #2.

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