Clorox Clocked On Growth Fears Brian Graney (TMF Panic)
August 12, 1999
Much of the credit for household grocery products maker Clorox's (NYSE: CLX) market-beating 25.6% compounded annual return over the past eight years can be chalked up to the company's knack for buying stagnant but leading brands and turning on the growth juice. From Pine-Sol to Black Flag to Armor All, the past decade for the company has been marked by one successful, growth-enhancing acquisition after another.
Analysts had been expecting much of the same from the biggest acquisition in the company's 86-year history -- the $1.96 billion January purchase of Glad trash bags and STP auto products maker First Brands Corp. However, it may be a while until the First Brands deal provides the kind of performance boost to Clorox that many observers have come to expect.
Today, the bleach giant posted fiscal fourth quarter EPS of $0.96 (excluding charges), matching estimates and giving analysts something to smile about initially. But those smirks turned into grimaces when details within the earnings release suggested that Clorox still has some housecleaning to do in regard to the acquired First Brands businesses.
Weak sales of former First Brands products like Glad, STP, and Jonny Cat and Scoop Away kitty litters led to an overall 3% year-over-year decline in Q4 revenues to $1.1 billion. Clorox said it has eliminated "inefficient promotional activities" that First Brands had used to boost sales in the same quarter last year, adding that it is working to correct inventory issues that had plagued First Brands before the acquisition. Yet, the sluggish sales figures were disappointing.
To make matters worse, sales of some of Clorox's key products were also weak. Brita water filters suffered a double digit volume decline and sales of Clorox's well-established cleaning products also came in below expectations. With gross margins sliding to 50.7% versus 51.5% a year ago and tough year-over-year comparisons looming in the next few quarters, analysts put out the caution flags. Fiscal year 2000 earnings estimates were chopped, near-term ratings were cut, and the stock was besieged by sellers. By the end of the day, Clorox's shares had suffered their largest one-day percentage drop in years, losing 16%.
With today's dive, the market is now saying that Clorox is worth $2.1 billion less than it was a mere 24 hours ago. Surely, cash flows over the next few quarters are going to be reduced, but does that justify such a large reduction in the present value of all future cash flows? Chairman and CEO Craig Sullivan apparently doesn't think so and remained steadfast in his belief that the First Brands acquisition will ultimately prove to be beneficial to Clorox shareholders. "The integration of these new businesses is progressing more smoothly than our initial expectations and we are on track with major initiatives," he said.
While Clorox may have misjudged the time it would need to light a fire under the businesses of such a large acquisition as First Brands, its track record for waking up sleepy consumer product franchises cannot be entirely discounted. With an enterprise value of $10.8 billion, Clorox is trading at 2.7 times fiscal 1999 sales of $4 billion and 28 times trailing net income of $390.1 million. That's still rich, but it's the most attractive valuation this company has seen in a while. Investors willing to look beyond a few quarters of bumpy results may want to take a closer look.