Investment Thesis – Clorox Co (CLX)

“The Clorox Company, incorporated on September 5, 1986, is a manufacturer and marketer of consumer and professional products. The Company sells its products primarily through mass retail outlets, e-commerce channels, wholesale distributors and medical supply distributors. The Company operates through four segments: Cleaning, Household, Lifestyle and International. The Company markets some of the consumer brand names, including namesake bleach and cleaning products, Pine-Sol cleaners, Liquid-Plumr clog removers, Poett home care products, Fresh Step cat litter, Glad bags, wraps and containers, Kingsford charcoal, Hidden Valley dressings and sauces, Brita water-filtration products and Burt’s Bees natural personal care products. The Company also markets brands for professional services, including Clorox Healthcare and Clorox Commercial Solutions. The Company manufactures products in approximately 10 countries and markets them in over 100 (markets).”     – Reuters.com

Clorox business segments (by operating income) as per Annual Report 2017:

  • Cleaning (34%)
  • Household (33%)
  • Lifestyle (16%)
  • International (17%)

Historical Growth data

  • Stable growing revenues and EPS over last 5 years
  • Large and stable FCF (FCF yield = 3.9%)
  • 3.1% dividend yield is good
  • 40 years consecutive dividend growth (Dividend Aristocrat) but recent dividend growth rate fell from 8% average before 2014 to 4% average after 2014
  • Dividend payout ratio (earnings) average around 60% which is acceptable
  • Strongly recession-proof as seen in Financial Crisis 07-09

Competitive Advantage (Moat)

  • Owns brands with strong brand names (many of which are market leaders in terms of market share)

Future Growth potential

  • Partnerships with fast-growing online retailers to grow sales in ecommerce channel
  • Cost savings has been successful thus far (and tax cuts will aid in this) although there is a limit in using cost cutting to boost net income
  • Only 17% of sales in international markets which provides room for expansion
  • Due to large size and huge FCF, has ability to buy up smaller brands to complement the portfolio

Micro-related risks

  • Declining operating margins due to increased commodity costs and tight logistics market
  • 1.3b worth of long-term debt but has seen gradual decrease over last few years (FY17 Total Debt/FCF = 3.58 which is acceptable)
  • No significant growth catalyst for the company due in part to being a mature stage business

Macro-related risks

  • The consumer staples sector as a whole has been facing high valuation premiums and low growth prospects

Current valuation

  • PE ratio of 22.81
  • Lowest PE ratio in 3 years
  • PE ratio lower than industry (55.5) and sector (42)
  • PE ratio lower than S&P500 PE of 25.7
  • However, current valuation is still considered high relative to the slow expected future growth rate of the business

Verdict

  • CLX has some growth potential in ecommerce and in international expansion but with little significant risks to the company. Despite the recent dip in prices, still priced at a relatively high valuation premium to its growth rate, but the stability of the stock in providing long term passive income makes it attractive. Will initiate a half position in the stock and am looking to complete a full position of the stock if prices fall to PE of 20 ($107) or lower.
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