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The Ratings Game: Clorox stock at risk as COVID cleaning habits return to pre-pandemic levels

Clorox was initiated at sell at UBS, part of a series of initiations in the U.S. household and personal care products category. Read More...

People aren’t cleaning the same way they did at the height of the COVID-19 pandemic, according to data compiled by UBS, which could put Clorox Co.’s growth strategy at risk.

Analysts initiated the company’s shares at a sell rating with a 12-month price target of $166.

“Many categories are still seeing elevated purchase levels, but overall there also appears to be a downward trend back to predicted growth had COVID not happened, suggesting less ‘stickiness’ longer term,” wrote analysts led by Peter Grom.

“Our analysis suggests that COVID-related tailwinds may abate faster than
previously anticipated… The stock has underperformed year-to-date, but we still see downside to estimates looking out to FY22 from lower category growth, higher
price elasticity impacts on volume, and margin headwinds from necessary reinvestment spend to right size market share.”

See: Handwashing rose, then fell, during COVID-19 — are U.S. hygiene standards slipping?

Cleaning products was one category that popped during the pandemic. But Clorox CLX, +1.66% has seen declines in recent months as vaccines roll out and consumers’ lives start to return to some sense of normal.

“Sales in cleaning business declined this quarter from lower shipments in a number of our cleaning and disinfecting products,” said Lisah Burhan, Clorox’s vice president of investor relations, during the most recent earnings call, according to a FactSet transcript.

Also: Clorox is still selling many more cleaning products than it was pre-pandemic

Clorox shares have also been squeezed, down 13.2% for the year to date while the S&P 500 index SPX, +0.28% has climbed nearly 14%.

“Share in some cleaning categories has stabilized of late as supply chain pressure has eased, but it is still down substantially when looking at a multiyear period,” UBS wrote.

UBS initiated a number of companies in the U.S. household and personal care products category. Among those that are buy rated are Colgate-Palmolive Co. CL, +0.62%, Scotts Miracle-Gro Co. SMG, -1.25% and Newell Brands Inc. NWL, +0.32%

“Newell’s largest and most profitable business unit, writing, inflected positively in Q1 and is poised for double digit growth in FY21 as both Newell and retailers plan for a ‘normal’ back to school season this year,” UBS said.

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UBS says the writing category is up 10.9% over the last 13 weeks. Analysts have a $33 price target on Newell.

Newell stock has rallied 25.3% for 2021 so far.

UBS took inflation, pricing and demand into account when looking at companies in this household category, which suggests the category will feel some near-term pressure.

But in the long run, “we prefer companies with diverse geographic exposure, leading brand positions, outsized category growth and improving share performance, which in turn drives consistent organic revenue growth.”

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