Why This Analyst Likes Clorox, Procter & Gamble In The Household Product Space

Earlier this week, Wells Fargo initiated coverage of a handful of household products. Chris Carey initiated or transferred coverage of the following stocks:

Coty Inc COTY: downgraded from Equal-Weight to Underweight with a price target lifted from $4 to $5.

Colgate-Palmolive Company CL: initiated at Underweight, $80 price target.

Clorox Co CLX: initiated at Overweight, $250 price target.

Procter & Gamble Co PG: initiated at Overweight, $160 price target.

Coty: Valuation Concerns: Coty's stock is expensive after gaining 150% in the past six months and implies a valuation of around 38 times 2021 estimated EPS and 21 times 2022 estimated EPS, Carey said in the downgrade note.

This is not only "historically expensive" versus the stock's average multiples but a 50%/8% premium to the home and personal care group and an even larger 64%/24% premium to the S&P 500 index, the analyst said. 

The stock's recent momentum followed the company's first-quarter report, whichshowed a strong operating profit beat.

The company missed on the top line, and organic sales fell more than expected, he said. 

"The only way we see for COTY to drive a sustainable turn in profit and work into its now historically high multiple is sales growth."

Related Link: Wells Fargo Taps Coca Cola, Monster In The Beverage Stock Race

Tough Decisions Ahead For Colgate-Palmolive: Colgate's management faces "tough decisions" ahead, and no outcome necessarily bodes well for the stock, Carey said.

First, management can sustain near peak ad spend and risk margin upside if the top-line deleverages on more normalized category growth, the analyst said. 

Second, management could cut ad spend to protect margins at the expense of losing sales, he said. 

Despite an uncertain path ahead, a bearish case for Colgate's stock does not imply "all is not well," Carey said.

Rather, the analyst said the company looks more exposed to headwinds versus peers that don't need to make similar decisions.

Clorox's 'Comp The Comp' Story: Clorox has three tailwinds working in its favor that should allow the company to "comp the comp" on the top line, Carey said. 

They are: 1) expectations for an incremental $500 million of sales from inventory restocking, 2) a fast-growing and margin-rich professional business and 3) investments in advertising and promotions in fiscal 2021 that should support growth or at least give management flexibility to drive earnings growth.

"In the long run, CLX's categories are on trend and CLX can leverage its portfolio for better shelf space and stickier placement," the analyst said.

"We believe demand for cleaning products is likely to sustain regardless, but especially the longer COVID cases remain high."

Procter & Gamble's Best Quarter In Decades: P&G just reported what could be its "best quarter in decades," and this signals that all the "hard work is done," Carey said. 

Specifically, the company's organic sales growth of 9% was the highest seen since 2005, while sales leverage helped bring in the highest quarterly operating margin in at least 20 years, the analyst said. 

The Street is underestimating the company's outlook moving forward as fiscal 2022 estimates might be $4 billion too low if the recent momentum continues, he said.

Also, P&G is growing faster in the U.S., and this will translate to higher margins, superior positive cash flow and EPS growth, Carey said. 

Finally, expectations for "significant earnings flexibility" means the company can return additional cash to shareholders, likely through share repurchases, according to Wells Fargo.