Normally, I don't pay a ton of attention to guidance releases, but in the case of a consumer staple like Clorox (NYSE:CLX), whose stock has been on a pretty decent slide over the past eight months, a little bit of optimism might just be a reason for a closer look.
To backtrack a bit, Clorox has been suffering from some operational ills of late, such as higher costs, while having a bit less luck with the top line than competitors such as Colgate-Palmolive (NYSE:CL) and Procter & Gamble (NYSE:PG). Pricing power has been a concern. (One of my colleagues told me that at his local grocery store, the Clorox bleach was actually selling for a lot less than the generic.) Let's be honest, with more and more dollars being spent at ruthless discounters such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), it's not easy for a company like Clorox to juggle the dueling realities of increasing commodity costs and a public that is unlikely to tolerate rising prices at the checkout counter.
The math of such a situation is pretty simple to understand. Lower margins plus flattish revenues equals stagnating earnings, except for those generous share buybacks that have been reducing the share count.
That's why Monday's announcement is interesting to those of us who like our stocks cheap. The firm announced that its second-quarter results will be buoyed, if only slightly, by price increases, though that will still represent top-line growth of only 2% to 4%. It expects $0.44 to $0.49 per share for the quarter, and maintained hopes for $2.91 to $3.06 for the year, which may be improved by moderating commodities prices.
Now, a close read of Monday's press release shows you what kind of company you're dealing with here. When a company looks for growth via products like "Kingsford charcoal with Sure Fire Grooves," you know you're not getting a barn burner. And global consumer brands aren't the easiest places to get maximized shareholder value -- just ask the folks holding Unilever (NYSE:UL) today. But on the other hand, with Clorox you are getting brands with some real power, which could help to limit any downhill slide the company experiences.
Last year, global brand strength coupled with mediocre operations and a big stock slide conspired to entice me to invest in Colgate-Palmolive. I made a decent return over a few months. But those who bough on the recommendation of my colleague, Philip Durell -- who ended up choosing the stock for Motley Fool Inside Value -- and held to now have done better. It's turned in a market-beating 20% return over the past year.
Turning back to Clorox, when I run a very basic valuation, I see the firms' shares as about 10% undervalued based on pretty conservative assumptions. (Your mileage may vary, of course, which is why Inside Value subscribers, or those who take a free trial, can run their own numbers on our nifty online discounted cash flow tool.)
That's not quite enough to get me to take the plunge, yet. But hunting for value often means stalking your game, then waiting around for the right opportunity. Investors on the lookout for a premium company at a bargain price may not have to wait much longer for Clorox.
For related Foolishness:
- Can Clorox Remove This Stain?
- Colgate: Another Boring Success
- Unilever: Slow Progress Is Still Progress
- A Small Surprise From P&G
Seth Jayson is always looking for a deal, in the bleach aisle or on the market. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. Unilever is an Income Investor pick. Fool rules are here.
