Carl Icahn did the white glove test on Clorox (NYSE: CLX ) and now he wants to clean house. After the company's board of directors rebuffed Icahn's $10.7 billion takeover bid, he decided to do the next best thing. As the largest shareholder of Clorox (at 9.4%), he proposed dumping the entire board of directors and replacing it with his own people ... including himself, of course.
But at what P/E?
Icahn's latest bid for control of Clorox came in at $80 a share, 25% higher than the share price as of Friday, Aug. 19. The buyout price would shoot the company's trailing twelve month P/E ratio, already at 31.3 -- after including its goodwill impairment -- to 38.6.
That valuation is better reserved for the high-growth potential, high-tech, start-up world. It's not for the blue-chip, consumer-products world. Yet, the Clorox board rejected Icahn's price because it said it would be a "steal." Icahn, too, has suggested his price was too low and that a giant consumer products company could come in and bid at least $100 a share.
Fellow Fool Rich Smith recently wrote about Icahn's $100/share "Clorox Pipedream." He compared Clorox to several of the companies that may be in a position to buy it. Stealing from Rich's article, they are (with updated comparative P/E ratios):
|
Company
|
P/E
|
| Clorox |
46.5* |
| Procter & Gamble (NYSE: PG ) |
15.7 |
| Unilever (NYSE: UL ) |
16.1 |
| Colgate-Palmolive (NYSE: CL ) |
17.5 |
| Kimberly-Clark (NYSE: KMB ) |
15.5 |
Source: Capital IQ, a division of Standard & Poor's. *If $100 per share.
I have to wonder why a company would make a bid for Clorox at that sky-high valuation. So I ask myself: Is Icahn trying to incite a bidding war for Clorox just to increase the value of his own holdings? Or does he truly want control of the company and thinks he can do a better job than the present management? Or, does Icahn just want to deconstruct Clorox by selling off its various brands?
It seems the present Clorox board of directors does not take Icahn's offer seriously. The market hasn't taken Icahn's bait either. Instead, Clorox has dropped since Icahn's original bid in July.
Some food for thought
Clorox boasts some attractive qualities:
- That high P/E should not necessarily turn an investor off to Clorox. After taking what should amount to a one-time charge to goodwill, the P/E comes back down to earth at 15.9.
- Clorox offers a 3.8% dividend yield and a five-year dividend growth rate of 14.4%. The payout ratio for that dividend is 55%.
- It has a very good trailing-twelve-month return on invested capital rate of nearly 16%. That's a solid performance.
Investors need to keep valuation ratios like P/E in perspective. One has to dig deeper into a company's income statement to determine just how valid those earnings actually are. Looking for items such as the above-mentioned "goodwill writedown," or for other one-time earnings boosts like income tax credits, can help determine how indicative a P/E ratio actually is of a company's value.
Clorox looks cheaper than its initial numbers indicate -- but does it interest you as a stock? Let me know in the comments below.
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