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Should You Add These Household Brands to Your Portfolio?

Here's our take on Clorox, Colgate-Palmolive, and Procter & Gamble.

Few other things have proved to be as pandemic-proof as the demand for personal and home cleaning products. The robust revenue and profit numbers of the consumer staples companies selling these products are a clear indication that no matter the level of uncertainty, consumers will continue to buy products considered essential. In fact, as evidenced by robust organic sales, personal and home hygiene products are particularly sought after as survival tools needed to limit the spread of the coronavirus.

Clorox, Colgate-Palmolive, and Procter & Gamble boast noncyclical, stable businesses that tend to do relatively well during economic upheavals and market downdrafts, meaning they can be expected to generate solid revenue during the pandemic and into the foreseeable future. They are leading players in Morningstar's consumer defensive coverage universe, as well as stable cash flow stories.

Year to date as of Oct. 29, owing to the coronavirus-driven sales of homecare products, these companies are trading well above their fair values, far outstripping the 6.77% gains for the Morningstar US Consumer Defensive Index. It may be prudent for value-seeking investors to wait for a meaningful pullback for an attractive entry point.

Clorox CLX Current yield: 2.10% Forward P/E: 28.49 Price: $209.88 Fair value: $154 Value: 36% premium Moat: Wide Moat: Trend Stable Morningstar Rating: ★ Data as of Oct. 29, 2020.

More than a century old, Clorox sells cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care products. The firm's product portfolio includes Clorox disinfecting wipes and bleach cleaner sprays, Liquid-Plumr (drain cleaners), Pine-Sol (floor cleaning agents), SOS (scouring pads and scrubs), Brita (water filtration), and Burt's Bees (personal care). About 85% of Clorox's sales come from its home turf.

"The COVID-19 outbreak has left consumers scouring the shelves for Clorox's fare, leading to a pronounced bump in near-term sales," writes Morningstar sector director Erin Lash in her equity report, noting its cleaning mix (around one third of sales) has soared more than 30% in each of the past two quarters. As a result, the company's shares up nearly 40% since the start of 2020, far exceeding the 5.2% gains for the S&P 500.

The pandemic has swayed more consumers to cook at home, creating an opportunity for the firm's Kingsford brand of charcoal briquettes. "Even if volumes decelerate as shelter-in-place initiatives are lifted and consumers gradually increase their consumption of food away-from home, we think Clorox has laid out a solid playbook that should steady the grilling business over time," adds Lash, who estimates the stock to be worth $154.

Colgate-Palmolive CL Current yield: 2.22% Forward P/E: 25.71 Price: $76.86 Fair value: $71.00 Value: 8% premium Moat: Wide Moat Trend: Stable Morningstar Rating: ★★ Data as of Oct 29, 2020.

Global consumer goods company Colgate-Palmolive makes a wide range of products, including oral care, personal care, and home care, which are sold across 200 countries around the world. International sales account for about 70% of its total, approximately 50% from emerging regions.

Bouncing back from two years of tepid sales, the company's organic sales were up 4% in 2019. "We think the balanced nature of the gains (a 2% benefit from increased volumes and 2% from higher prices) is a testament to its recent strategic course and unwavering competitive edge," says Lash.

The firm's sales this year have gotten a boost from coronavirus stock-up trips. A portion of these gains is attributed to "consumers' penchant for home and personal cleaning," says Lash, who adds that "the pace of gains will decelerate over the next several quarters, as consumers work through their at-home inventory."

Colgate's portfolio should prove resilient even though the economic recovery will likely remain weak. "We're encouraged that management's rhetoric suggests a commitment to investing in product innovation to prompt consumers to stay within its brand pillars regardless of the economy," says Lash, who recently upped the stock's fair value to $71 from $70, prompted by improved cash generation.

Procter & Gamble PG Current yield: 2.22% Forward P/E: 26.32 Price $137.66 Fair value: $111.00 Value: 24% premium Moat: Wide Moat Trend: Stable Morningstar Rating: ★ Data as of Oct 29, 2020.

One of the world's largest consumer goods producers, Procter & Gamble owns an impressive array of household brands, including 21 that generate more than $1 billion in annual global sales, such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Pampers diapers. International sales represent around 55% of the total, with around one third coming from emerging markets.

"Procter & Gamble knocked the ball out of the park again to start its fiscal 2021, posting 9% organic sales growth (on top of 7% growth a year ago), 170 basis points of gross margin expansion, and 320 basis points of adjusted operating margin improvement," says Lash.

Although a portion of this performance is ascribed to the pandemic-driven rush for home, health, and hygiene products, Lash argues "that P&G had begun to steady its footing long before COVID-19 arrived."

The company's decision to trim its brand mix to just 65 after shedding more than 100 "was a critical step that has facilitated its ability to hone its resources on the highest return opportunities and more nimbly respond to evolving consumer trends," Lash notes. The company recently posted its eighth consecutive quarter and second consecutive year of mid-single-digit organic revenue growth, prompting Lash to bump up the stock's fair value to $111 from $109.

Lash assigns the firm a wide moat supported by its position as a leading household and personal-care manufacturer (25% share of baby care, more than 60% of blades and razors, around 25% of feminine protection, and approximately 25% of fabric care).

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