The search for undervalued companies has yielded many results after the recent downturn in the market. However, none stick out more than The Clorox Company (NYSE:CLX). This international titan has fallen over 6.5% from its 52-week high, and is poised for a large run from its current level.
Clorox is a worldwide leader in the manufacturing and marketing of consumer products. It is home to some of the most popular brands that many consumers use every single day. In fact, 90% of Clorox's brands hold the number one or number two ranking in its market:
|Clorox Disinfecting Wipes||45%||#1|
|Clorox Toilet Bowl Cleaner||35%||#1|
|Tilex / Clorox Bath Cleaner||21%||#1|
|Kingsford / Match Light||72%||#1|
|Brita Water Filtration||68%||#1|
|Clorox Clean-Up Spray||14%||#2|
|Clorox 2 for Colors||26%||#2|
|Fresh Step / Scoop Away||27%||#2|
|Glad Disposal & Food Storage||19%||#2|
|Hidden Valley Salad Dressing||17%||#2|
Fourth quarter results
On Aug. 1, Clorox released its fourth quarter report for fiscal 2013. The results were mixed, but positive overall.
- Earnings per share of $1.38 vs. expectations of $1.34
- Revenues of $1.5 billion vs. expectations of $1.6 billion
Fiscal 2013 results
|Earnings Per Share||$4.10||$4.31||5.12%|
|Revenues||$5.468 billion||$5.623 billion||2.84%|
|Gross Margin||42.1%||42.9%||80 basis points|
Financial results for fiscal 2013 were in-line with analyst expectations. The most notable statistic in the report is the increase in gross margin. By making more profit on its products, Clorox's volume could remain flat and still see its revenue rise. Gross margin could easily surpass the 43.5% mark for fiscal 2014.
In the fourth quarter report, Clorox confirmed its outlook for fiscal 2014. The expectations currently call for:
- 2%-4% sales growth
- Earnings per share of $4.55 to $4.70
- Increased cost savings
- Lower selling and administrative costs
Free cash flow
Clorox reported $583 million in free cash flow for 2013, a 36% increase from 2012. This free cash flow is often used to increase distributions to shareholders, as it has raised its dividend every year since 1977. There is no reason for this streak to end anytime soon.
Free cash flow has also been used by management to initiate share repurchases. Share repurchases reduce the amount of shares outstanding, which boosts earnings per share and makes the remaining shares more valuable. In the fourth quarter, Clorox repurchased about 1.5 million shares for approximately $128 million. Management says its number one priority is creating stockholder value, and their actions confirm this to be the truth.
The household products industry provides plenty of competition for Clorox. Proctor & Gamble (NYSE:PG) and Kimberly-Clark (NYSE:KMB) are two of the largest companies in the world. Proctor & Gamble is most known for its brands such as Tide, Duracell, Vicks, Mr. Clean, Pampers, and Febreze. Kimberly-Clark's brand portfolio includes Kleenex, Cottonelle, Huggies, Scott, and Kotex. All of these include products we currently use or have used in the past, much like Clorox's line.
|Company||Clorox||Proctor & Gamble||Kimberly-Clark|
|Market Cap||$11.1 billion||$219 billion||$36.8 billion|
(Source: Yahoo! Finance)
All three of the companies in focus have incredible brand strength and market share. In the analysis, Clorox is shown to be trading at the cheapest valuation today, but all have favorable growth going forward and have performed well year-to-date. Through innovation, they each have the ability to continue to grow for decades and would make for good investments. However, Clorox's low market cap gives it a much higher potential to double or become the next big takeover target. For years, Clorox has been said to be the perfect fit for Warren Buffett's Berkshire Hathaway portfolio, and I could not agree more. Buying a stock based on the possibility for a takeover is not always a smart move, but when it comes to a fundamentally strong company that will do well regardless, it is very smart.
The bottom line
Clorox is one of the most undervalued companies in the market today. It is expected grow consistently over the next several years, and its healthy 3.4% dividend will provide additional returns. Keep an eye on this one and take a look to see if it would fit your investment strategy.