What do you get when you mix substandard performance, an earnings revision, a share-repurchase plan, and a credit-rating cut? In the case of Clorox
First, the bad news
Clorox reported a disappointing fourth quarter, with revenues coming in flat, excluding the contribution of a recent acquisition. The company still managed to expand margins, but earnings per share came in at the low end of expectations. Adding insult to injury, Clorox declared that increased anticipated charges would require it to cut its forecast for fiscal 2008. A few days later, Fitch Ratings cut its credit rating on Clorox based on the company's plan to repurchase shares, because Fitch figured the buyback would be funded by debt that would leave Clorox operating at higher debt-to-capital ratios.
For the quarter, total net sales inched 1.9% higher, but according to management, when excluding the impact of recently acquired bleach businesses in Canada and Latin America, sales were flat.
Perhaps best known for its bleach, Clorox also sells many other familiar consumer products, among them Glad plastic bags and wraps, Liquid-Plumr, Tilex, Pine-Sol, Armor All, and Kingsford brand charcoal. Everyone knows these names, and they make Clorox another one of those consumer-staple ideas that sector strategists favor in times of market peril. But Clorox has problems of its own right now, as it described in its Q4 report. Competition and higher commodity input prices are limiting the company's prospects.
Clorox has three reportable segments. Its households group made up 45% of fiscal 2006 sales, but this sector's sales fell 2% in Q4. During its conference call, management specifically noted tough competition vying against its disinfecting-wipes product, and the company also said that poor weather in April hurt auto-care product sales.
Sales in the specialty group (41% of full-year 2006 sales) rose 1% on strong demand for Glad products -- on the heels of heavy promotional efforts -- and from improved cat-litter sales. Still, one of the coldest Aprils in recent history apparently affected charcoal sales by causing a sharp drop-off in backyard barbecuing.
Things looked better in the international segment (14% of FY 2006 sales), which experienced 21% sales growth this past quarter. However, a closer look reveals that about 12 percentage points of that growth came from newly acquired business and favorable foreign exchange rates.
Still, Clorox impressively squeezed out 50 basis points of gross-margin expansion, despite the revenue softness. Ongoing cost-cutting initiatives and price increases outweighed higher trade-promotion spending, increased logistics costs, and higher agricultural commodity costs.
Even so, things were not as good as they may seem. Even with an improved tax rate and the repurchase of 1 million shares, if you exclude the $0.16 per share of charges to last year's quarter, Clorox actually earned a penny less per share than in last year's comparable reporting period.
As if the company's revenue disappointment wasn't enough, the revised guidance drove shares 3% lower through Aug. 8 from the day before reporting earnings. Considering its "safe haven" appeal, that's poor performance when compared with the 2.2% correction in the S&P 500 Index from Aug. 1 through Aug. 8.
Clorox had already forecast charges of about $0.06-$0.08 per diluted share for the consolidation of its home-care manufacturing network, but the company expanded its charge expectations by another $0.15-$0.17, as management decided to forestall certain new venture investments and to consolidate its international supply chain. Because of these moves, Clorox reduced its fiscal 2008 earnings guidance to a range of $3.27 to $3.46 per share, from a previous forecast of $3.44 to $3.61.
You said there was good news?
Clorox has some cleaning up to do if it wants to restore an impression of reliability among investors seeking a safe haven. In valuation terms, the company compares well with its consumer-staple peers, in this Fool's view. On a price-to-earnings basis, it's likely being penalized for its forecast setback and its stalled growth. But as far as dividend yield goes, Clorox offers a payout about as rich as those of any of its peers.
|
Company |
P/E TTM |
Dividend Yield |
|---|---|---|
|
Clorox |
18 |
2.7% |
|
Church & Dwight |
22.5 |
0.7% |
|
Proctor & Gamble |
22 |
2.1% |
|
Kimberly Clark |
18 |
3% |
|
Colgate-Palmolive |
22 |
2.1% |
The company has strong brands and a grand opportunity to grow internationally. Those are probably the two most important components of the formula for the company's future success. The tragic loss of its CEO in its recent past may have played a role in the company's recent slippage, but I anticipate that management will reassess its strategy and adjust as necessary moving forward. It's already laid out its "Centennial Strategy," which is gearing Clorox up to seek double-digit annual percentage growth in economic profit. "Economic what?" you must be asking. That's the profit a company makes above the cost of assets used to generate those profits.
I think Clorox has the right mind-set and strategy here, and its valuation seems to offer an opportunity for the stock to move toward its historical mean value of 21.5 times P/E over the past four years.
Ready to clean up?
As long as the company can get a handle on commodity cost pressures and competition, we can expect safe-haven capital flow and mean revision to help Clorox's performance going forward. Despite Fitch's view, share repurchases should help the company toward that end as well. So in my somewhat contrarian viewpoint, Clorox has appeal.
Further Foolishness:
Colgate-Palmolive is a Motley Fool Inside Value recommendation. See what value you can squeeze out of the market by checking out Inside Value free for 30 days.
Fool contributor Markos Kaminis has no ownership interest in any of the companies discussed here, and he really despises washing dishes. The Fool has a disclosure policy.
