Name That Trade – $CLX: Expensive Price to Pay for Yield

by Dan February 3, 2015 1:48 pm • Commentary

Clorox (CLX) reports their fiscal Q2 results tomorrow before the open.  The options market is implying about a 2.5% one day move which is double the average over the last 4 qtrs of about 1.25%.

Not only is the stock not a big mover on earnings, but options on the stock trade by appointment with total open interest of 18,00o contracts with 12,500 calls and 5,500 puts.  The single largest strike of open interest is 3,000 of the Feb 110 calls. Total options volume is kind of surprising for a company with nearly a $14 billion market cap.

Short dated options prices are well bid, as evidenced by the high implied earnings move, but still below levels from the October correction when the stock was 10% lower:

[caption id="attachment_50549" align="aligncenter" width="600"]CLX 1yr chart of 30 day at the money implied vol from Bloomberg CLX 1yr chart of 30 day at the money implied vol from Bloomberg[/caption]

The stock has had a massive run since mid September when the stock gapped from $90 to new all time highs (at the time) on news that they would exit an unprofitable business in Venezuela, and rumors that the company had declined a take-over offer that assigned a 20% premium to the value of the stock at the time.  The stock is now up 20% since:

[caption id="attachment_50551" align="aligncenter" width="600"]CLX 1yr chart from Bloomberg CLX 1yr chart from Bloomberg[/caption]

The stock caught my eye because much like our PG trade from last week (Trade Update $PG: Closing Feb Put Spread For a Double) the perceived defensive stock with a 2.75% dividend yield, trades at 24x expected fiscal 2015 earnings growth of only 5%, on flat at best sales growth.  Here is the thing, CLX, unlike PG gets 80% of their sales from the U.S. so the recent strength in the dollar could be a tailwind in a period where many of its peers are bracing for increased dollar strength hurting profits.

Regardless, this is an expensive stock, and you have to ask yourself what multiple is appropriate for the company’s growth profile and dividend yield.  The 10 year chart below from Bloomberg shows CLX’s  P/E at a 10 year high. Given the environment we are in I would suggest the stock is priced for perfection and the slightest hiccup to results and or guidance could send it lower:


It’s tempting to put on a similar view to that of PG but the domestic/dollar issue is the thing that keeps it from being a no brainer. In addition to that, I’d want to have my risk defined and options are wide and illiquid.