How Much Is Clorox Worth?

Most consumers are very familiar with Clorox's (NYSE: CLX  ) flagship product -- bleach. For the member of the household who has to do the laundry, Clorox's bleach products may be more familiar than they'd like.

But investors should be careful not to pigeonhole Clorox as "the bleach company." Clorox is certainly an important brand for the overall company, but it's just one among a portfolio of strong brands that includes Glad, Kingsford, Burt's Bees, and Pine-Sol. And it's that portfolio of brands that is helping the company continue to grow and become more profitable both in the U.S. and abroad.

Shares of Clorox currently change hands at a bit less than $66 per share. Is that a good deal? Well, first we need to get an idea of what Clorox's shares are really worth.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how Clorox stacks up.

Company

Total Enterprise Value / Trailing Revenue

Price / Trailing Earnings

Price / Forward Earnings

Trailing PEG

Clorox

2.1

15.5

14.3

1.6

         

Avon Products (NYSE: AVP  )

1.3

20.4

14.0

1.8

Church & Dwight (NYSE: CHD  )

1.9

16.3

15.2

1.4

Colgate-Palmolive (NYSE: CL  )

2.5

17.9

15.1

1.8

Energizer Holdings (NYSE: ENR  )

1.5

13.2

11.4

1.3

Kimberly-Clark (NYSE: KMB  )

1.7

14.1

13.3

1.7

Procter & Gamble (NYSE: PG  )

2.5

17

15.2

1.8

Average

1.9

16.5

14

1.6

Sources: Capital IQ, a Standard & Poor's company, and Yahoo! Finance. Average excludes Clorox.

Using each of those averages to back into a stock price for Clorox, and then taking the average across those results, we can come up with an estimated price-per-share of right around $65. This would suggest that Clorox is pretty fairly valued.

A comparable company analysis like this focuses on a stock's valuation in relation to other similar stocks. That means that the results depend a lot on the group as a whole being properly valued.

I recently suggested that P&G may currently be fully valued, but that Kimberly-Clark looks to be undervalued. On the whole, though, I think that the group of consumer staples stocks we're looking at could be undervalued. What does that mean for Clorox? If a stock is considered fairly valued compared to a group of undervalued stocks, well, then it might actually be undervalued too.

But before we jump to any conclusions, let's look at this from another angle.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow (DCF) analysis. Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (a.k.a. guesses) and it attempts to predict the future, it can be a fickle beast and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For Clorox's DCF, I used the following assumptions:

2011 Unlevered Free Cash Flow

$793 million

FCF Growth 2011-2015

10%

FCF Growth 2016-2020

5%

Terminal Growth

3%

Market Equity as a Percentage of Total Capitalization

77%

Cost of Equity

12%

Cost of Debt

5.2%

Weighted Average Cost of Capital

10%

Sources: Capital IQ, a Standard & Poor's company; Yahoo! Finance; author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $90 for Clorox's stock. This appears to seriously reinforce the supposition that Clorox is actually undervalued.

Now I should note that the growth rate that I used for the next five years was based on analysts' estimates. While the company has shown the ability to grow free cash flow at that rate -- and higher -- analysts often end up overestimating prospective growth.

So for sake of comparison, if we throttle down growth to 8% for the first five years and 4% for the next five, the DCF value drops to $78 per share. That's lower for sure, but still well above today's share price. If we drop growth rates to 6% and 3%, respectively, we'd say that today's share price is a fair one.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well advised to play with the numbers further before making a final decision on Clorox's stock.

That said, the range of $66 to $90 that we got from the two valuation methods seem to say that Clorox's stock is undervalued right now. At the midpoint between the two estimates we get $78 -- 18% above today's stock price.

Clorox is a stable company with a portfolio of strong brands, opportunity to grow both domestically and internationally, and is a member of Standard & Poor's "dividend aristocrats." With an apparent discount on its stock right now, this is a stock that I think investors should at least have on their radar.

Do you agree that Clorox's stock is undervalued? Head down to the comments section and share your thoughts.

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Energizer Holdings is a Motley Fool Inside Value recommendation. Energizer Holdings is a Motley Fool Stock Advisor choice. Clorox, Kimberly-Clark, and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookies were harmed in the making of this article.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 04, 2010, at 5:13 PM, neamakri wrote:

    Matt; Thanks for your article. I agree that Clorox is sure to grow.

    That being said, you need to watch your math. The first column of "total enterprise value/trailing revenue" is wrong. If you total the values and revenues you will get an average number over 2.2. The reason is that the companies are so widely separated in size. For example, PG is thirty times larger than CHD, and thirty times larger than ENR. You simply cannot average ratios; it's bad math.

    Please continue writing fine articles. Thanks.

  • Report this Comment On September 04, 2010, at 6:50 PM, TMFKopp wrote:

    Hey neamakri

    Thanks for the comment!

    Actually the math is correct. We're not looking for the overall revenue multiple for the group, but rather the average multiple -- which is an average of the multiples, not the total EVs and revenues.

    The reason for this is that what we're looking for is a sense of what investors are, on average, willing to pay for shares of a consumer staples company (as measured by the valuation multiples). If we calculate the average value as you suggest, then we get a value that's simply tilted towards the larger companies like PG, CL, and KMB. At that point you might as well just use those three companies because the rest of the group contributes comparatively little to the calculation. In other words, we end up with what I'd consider a less robust result.

    Another reason a size-weighted average multiple doesn't do much for us is because PG, KMB, and CL are significantly larger than CLX. If we were to argue that size has a big impact on the valuation multiples, then we'd probably want to kick those companies out altogether because they'd be less comparable to CLX (though I wouldn't necessarily make that argument).

    Anyway, I appreciate you keeping me honest, but in this case (unless I'm misunderstanding your comment) I think we got it right.

    Matt

  • Report this Comment On September 05, 2010, at 5:34 PM, neamakri wrote:

    Matt;

    Don't throw any numbers away ~ typically when looking for an average, the more data the better.

    Lets compare PG and CHD. Lets say for example that the average investor puts a million dollars into a company. That makes 171,000 investors in PG and 4,460 investors in CHD (per market cap). That is a ratio of 38:1. Suppose that every investor is going to vote for "the ratio" for his company. So we get 171,000 votes for the ratio for PG. We give each investor in CHD 38 votes to vote for "the ratio" for his company. So CHD gets about the same number of votes, and we give equal weight to the ratio from each company, for our final average.

    Since each investor in CHD got 38 votes, they must be 38 times more important, or 38 times smarter than each investor in PG.

    You have tons of experience in the stock market, and I look forward to your next article.

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