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.

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:

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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