The Clorox Company manufactures and markets consumer and professional products worldwide. The companys Cleaning segment offers laundry additives, including bleach products under the Clorox brand, and Clorox 2 stain fighter and color booster; home-care products primarily under the Clorox, Formula 409, Liquid-Plumr, Pine-Sol, S.O.S, and Tilex brands; naturally derived home care products under the Green Works brand; and cleaning and disinfecting products under the Clorox, Dispatch, Aplicare, HealthLink, and Clorox Healthcare brands. Its Household segment offers plastic bags, wraps, and containers under the Glad brand; cat litter products under the Fresh Step, Scoop Away, and Ever Clean brands; and charcoal products under the Kingsford and Match Light brands. The companys Lifestyle segment provides dressings and sauces primarily under the Hidden Valley, K C Masterpiece, and Soy Vay brands; water-filtration systems and filters under the Brita brand; and natural personal care products under the Burts Bees and güd brands. The Clorox Company also markets its products primarily under the Javex, Glad, PinoLuz, Ayudin, Limpido, Clorinda, Poett, Mistolin, Lestoil, Bon Bril, Nevex, Agua Jane, and Chux brands. The company sells its products primarily through mass merchandisers, warehouse clubs, grocery stores, other retail outlets, distributors, and medical supply providers, as well as a direct sales force, combination of direct sales teams, and network of brokers.
Analysts expect Clorox to grow earnings 8.04% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter, right around the long term inflation rate. Running these numbers through a two stage DCF analysis with a 10% discount rate yields a fair value price of $78.83. This means that at $73.63 the shares are undervalued by 6.6%.
Over the last 12 months, Clorox's EPS were $4.12 and it's current book value per share is -$0.15. The Graham Number cannot be calculated so I'm disregarding this valuation method.
Average High Dividend Yield:
Clorox's average high dividend yield for the past 5 years is 3.58% and for the past 10 years is 2.98%. This gives target prices of $71.55 and $85.81 respectively based on the current annual dividend of $2.56. These are overvalued by 2.9% and undervalued by 14.2%, respectively. I think the average dividend yield will be slowly creeping higher and that the 5 year average is a good representation of where it will be so I'll use the 5 year average low dividend yield for my fair value calculations.
Clorox's average low PE ratio for the past 5 years is 14.51 and for the past 10 years is 14.79. This corresponds to a price per share of $62.54 and $63.76 respectively based off the analyst estimate of $4.31 per share for the fiscal year ending in June 2013. The 5 year and 10 year low PE price targets are overvalued by 17.7% and 15.5%, respectively. With the average low PE ratios being near 15, it seems that investors have typically given Clorox a premium over the market in general.
Average Low P/S Ratio:
Clorox's average low PS ratio for the past 5 years is 1.40 and for the past 10 years is 1.60. This corresponds to a price per share of $60.69 and $69.55 respectively based off the analyst estimate for revenue growth from FY 2012 to FY 2013. Their current PS ratio is 1.76 over the last 12 months. The 5 year and 10 year low PS price targets are overvalued by 21.3% and 5.9%. Like the high dividend yield and low PE ratio valuations I think the 5 year average will be more typical going forward than the 10 year average.
Dividend Discount Model:
For the DDM, I assumed that Clorox will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 9.09% from the 1 year growth rate. After that I assumed they can continue to raise dividends for the next 3 years at 75% of 9.09%, or 6.82%, and by 3.50% in perpetuity. The dividend growth rates are based off fiscal year payouts and don't necessarily correspond to quarter over quarter increases. To calculate the value, I used a discount rate of 10%. Based on this, Clorox is worth $52.47 meaning it's overvalued by 40.3%.
Clorox's trailing PE is 17.92 and it's forward PE is 17.13. The PE3 based on the average earnings for the last 3 years is 17.94. I like to see the PE3 be less than 15 which Clorox is over by quite a bit. This goes back to investors giving Clorox a premium due to it's stability and predictable nature. Compared to it's industry, CLX seems to be undervalued versus CL (20.61) and PG (19.04). Against the industry as a whole, CLX is fairly valued with the industry carrying a PE ratio of 17.99. All industry comparisons are on a TTM EPS basis. Clorox's PEG for the next 5 years is currently at 2.14 while Colgate-Palmolive is at 2.35 and Proctor & Gamble is 2.16. A low PEG ratio is better because it means that you're paying less for the growth of the company.
Clorox's gross margin for FY 2011 and FY 2012 were 46.8% and 45.4% respectively. They have averaged a 47.1% gross profit margin since 2001 with a low of 44.8% in FY 2001. Their net income margin for the same years were 10.6% and 9.9%. Since 2001 their net income margin has averaged 10.1% with a low of 7.9% in FY 2002. I typically like to see gross margins greater than 60% and at least higher than 40% with net income margins being 10% and at least 7%. Clorox is doing good but not great on the gross margin requirement and is doing well on the net income margin. Since each industry allows for different margins it's prudent to see how CLX compares to their industry. For FY 2011, Clorox captured 121.6% of the gross margin for the industry and 176.7% of the net income margin. This is very promising because it means that their operations are more efficient and that they have some pricing power. It also means that for every $1 in revenue they are able to turn more into profit for the company that can either be reinvested back in the company or returned to shareholders. Their cash-to-debt ratio for the same years were 0.12 and 0.17. I prefer for companies I'm investing in to have very little debt on their books and to have a cash-to-debt ratio greater than 1. This is the only real blemish from a fundamentals perspective, although they did make some progress on it over the last year.
Clorox's shares outstanding have decreased every year since 2001 except for in 2009. They've bought back over 45% of the shares outstanding in that time, with an average of 5.33% purchased each year. By repurchasing shares, Clorox is able to increase EPS and management can return cash to shareholders this way by increasing the ownership share of the company for all the outstanding shares.
A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.
Clorox is a dividend champion with 35 consecutive years of dividend increases. Their current annual dividend sits at $2.56 for a current yield of 3.48%. Clorox's annual increases for the last 1, 3, 5 and 10 years have been 9.09%, 9.26%, 14.87% and 11.07%. These numbers are different from the actual quarterly increases since these are based off the dividends paid out during each fiscal year. Despite the really nice DGR, their payout ratio has actually decreased from 61.76% in FY 2001 to 58.68% in FY 2012. The highest payout based off earnings was in FY 2001 and reached a low of 36.81% in FY 2007. They have averaged a 48.97% ratio between FY 2001 and FY 2012. Considering they've been growing the dividend with over 10% annual increases over the last 10 years, it's very nice to see that the payout ratio has decreased, albeit just slightly.
Their FCF per share has been pretty good over the years, but not great. Since FY 2001 they had only 1 negative year, FY 2008, and 2 years with a FCF payout ratio over 100%. I'd like to see the FCF payout ratio decrease come the end of this fiscal year in June 2013.
Return on Equity and Return on Capital Invested:
Clorox's ROE value can't be really be measured so we'll have to look more into the ROE calculation. Return on equity is calculated by taking the TTM EPS and dividing that by the shareholder equity (total assets minus total liabilities). Several things will change the ROE for a company such as decreasing the shares outstanding (increases ROE) or paying off debt (decreases ROE). If we look more into the numbers we see that Clorox has been paying off it's debt fairly aggressively since FY 2008. Currently it's shareholder equity is negative but improving, which leads to the ROE being a pretty pointless value to judge the value of Clorox. Their ROCI has averaged 27.9% since 2001 with a low of 14.9% and a high of 37.8%. For both ROE and ROCI I don't necessarily look for any absolute values rather I like to see stable or increasing levels over the long term. Clorox is improving it's ROE even though it can't be seen in the numbers and it's ROCI is very solid around 28% over the time frame.
Revenue and Net Income:
Since the basis of dividend growth is revenue and net income growth, we'll now look at how Clorox has done on that front. Their revenue growth since 2001 has been 3.11% per year and their net income has been growing at a 4.74% rate since 2001. Since their net income has been growing faster than revenue their net income margin has increased from 8.33% to 9.89% between FY 2001 and FY 2012. This means that management has been able to get operations more efficient and they are able to keep more pennies from every dollar of sales to reinvest in the company or return to shareholders. Revenue has grown every year except one since FY 2001.
The average of all the valuation models gives a fair value $65.22 which means that Clorox is currently trading at a 12.9% premium to the average fair value. I've also calculated the fair value with the highest and lowest valuation methods thrown out. In this case, the DCF and DDM valuations are thrown out and the new average is $64.93. Clorox is trading at a 13.4% premium to this price as well. Barring a full on recession I don't think you'll see Clorox trade down into the $40's since even in 2009 the shares only traded down to a 12.3 PE ratio.
Overall I would say that Clorox is on the high end of it's fair value range. It isn't grossly overvalued but doesn't represent a solid value at the current price. I would need a pullback to at least the $68 range or possibly sell puts to give a price near that before I would feel comfortable initiating a position. is in the fair value range but a further pullback would be welcomed. My average fair value calculation is more of a low value price target since I'm taking the low PE, dividend and PS ratios to calculate the value. Picking up shares for less than my "average fair value" calculation price targets is usually a sign that you're getting a really good value on the shares as long as nothing has fundamentally changed with the company to give prices that low. As as DG investor, Clorox is enticing because the starting yield is almost 3.50% with a nice 10 year growth rate over 10%.
I thought we should also take a look at the potential returns that you could be looking at if you buy in at current prices. If Clorox can grow their EPS at the rates that I used in my DCF analysis then after 10 years their EPS will be $7.25. Applying the 5 year average low PE ratio of 14.51 to the EPS would mean that shares would be trading for $105.26. This would be a 142.96% return over 10 years. However we also have to account for the dividends. In that same time you would have received $37.85 in dividends if they can grow dividends at the rates I used in my DDM analysis. This would represent a further return of 51.41% if dividends are not reinvested. The 10 year total return would be 194.37%, for an average annual return of 6.87%. If you can purchase shares at my fair value price of $65.00 your total return would be 220.18% for an average annual return of 8.21%. If the price pulls back to the $60's I'd be tempted to initiate a position on the hopes of picking up more shares to average down. A $68 entry price would give an average annual return of 7.73% over the next 10 years.
What do you think about Clorox as a DG investment at today's prices?