Worldwide powerhouse Clorox (CLX +2.15%) is an undisputed leader in the manufacturing and marketing of consumer products. It is home to some of the most popular brands that the majority of U.S. consumers use every single day. In fact, 90% of Clorox's brands hold the No. 1 or No . 2 ranking in their markets. However, the stock has faced several downgrades in recent weeks; analysts have used the words "overvalued" and "weak," but these are far from proper descriptors. Those who have downgraded the stock do not have flawless track records by any means, so let's do the research on our own and draw our own conclusions.
Recent downgrades
| Date | Agency | Rating |
|---|---|---|
| Sept. 18, 2013 | Barclays | To equal-weight from overweight |
| Sept. 20, 2013 | Credit Suisse | To underperform from neutral |
| Oct. 17, 2013 | Morgan Stanley | To underweight from equal-weight |
Barclays' reason for downgrading was its belief that recent product developments would not impact Clorox's long-term growth. Credit Suisse cited weak category growth, increasing prices of raw materials, and competitive pressures when backing its underperform rating and price-target reduction to $78. Finally, Morgan Stanley piggybacked Credit Suisse's reasoning and added weak consumer spending in the United States.
However, I see Clorox's products only gaining strength over the next several years and retaining large market shares in several spaces. Increased raw materials prices can easily be passed on to the consumer because Clorox will not be the only company faced with this issue. When it comes to competition, Clorox has been facing the same top companies for decades. There has yet to be a major issue that management has not been able to handle. Finally, consumers will continue to spend money on necessities, like the products Clorox offers; if the thought of lowered consumer spending worries you, run away from luxury goods or high-end retailers, not household products.
Today versus history
At today's price, Clorox is trading at 19.6 times its annual earnings of $4.31 reported on Aug. 1. Clorox has a five-year average price-to-earnings multiple of 16.73, which makes today's valuation slightly higher. However, 19.6 is still a reasonable multiple when you consider that competitors Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB) are trading at multiples of 20.40 and 20.96, respectively.
In this same report, Clorox affirmed its fiscal 2014 outlook. It expects to earn between $4.55 and $4.70; this is right in line with the consensus analyst estimates, which call for annual earnings of $4.58 per share. This earnings projection would make Clorox's forward multiple about 18.45. This is still slightly above Clorox's five-year average, but again, this is still in a reasonable range considering Procter & Gamble's 16.87 and Kimberly-Clark's 16.27 forward multiples.
Free cash flow utilization at its finest
On top of the favorable forward estimates, Clorox is actively using its ample free cash flow to initiate share repurchases and pay dividends. The company reported $583 million in free cash flow for fiscal 2013, a 36% increase from 2012. In this same report, it announced the repurchase of 1.5 million shares for roughly $128 million. These buybacks reduce the amount of shares outstanding, which increases earnings per share for the remaining shares and makes them more valuable. Currently, Clorox pays a hefty 3.3% dividend. It has raised its dividend every year since 1977, and it is safe to assume this streak will continue.
The bottom line
Clorox is a growing household products company with favorable forward estimates and a strong dividend. It has the potential to return a substantial amount to its shareholders via price appreciation and the aforementioned dividend. I would not be against this stock, and think it is a great opportunity for investment on any weakness.
