Carl Icahn has made billions by purchasing large positions in companies and then agitating for some type of action – such as a massive dividend, restructuring or merger.
His latest move is for Clorox (NYSE:CLX). Last Friday, Icahn announced a $10 billion takeover of the company, with a bid at $76.50 a share. On the news, the stock price increased nearly 9% to $74.55.
Interestingly enough, the bid wasn’t necessarily a surprise since Icahn had bought a stake in Clorox in February (it is currently at 9.4%).
But after the recent spike in the stock from Icahn’s offer, is there still more room for gains? Here’s a look at the pros and cons:
Strong brands. They include recognized names like Armor All, Kingsford, Hidden Valley and Glad. In fact, close to 90% of the portfolio consists of No. 1 and No. 2 brands in their categories. This certainly helps with pricing power and maintaining margins — consider that Clorox has posted increases in earnings before interest for the past five years.
Innovation. Clorox has been serious with research & development. Over the past three years, annual expenditures increased from $111 million to $119 million. As a result, Clorox has been launching next-generation products, such as those based on organic materials.
But Clorox has also used acquisitions to add premium products. For example, in 2007 the company shelled out $925 million for Burt’s Bees. The company develops “earth-friendly” natural skin care and beauty products.
Cost cutting. Clorox has remained a disciplined organization. The company’s management has been focused on finding efficiencies and savings.
Product differentiation. Even though Clorox has a strong set of brands, there are still problems. The company must deal with private-label offerings, which are seeing more demand from value-conscious consumers, and, let’s face it: how important is brand loyalty with products like bleach and charcoal?
Clorox also has a large footprint in the U.S., which could be a problem if the economy continues to remain sluggish.
Squeeze. In the latest quarter, Clorox lowered its earnings guidance. The company indicated pressures from rising costs. To deal with this, Clorox has been increasing its prices. However, this is likely to stunt overall demand and could mean deterioration in market share.
Valuation. Clorox’s stock is far from cheap. The shares currently trade at about 9.5 times cash flows and 18 times earnings.
Icahn has been clear that his goal is to encourage other bidders to make offers for Clorox. He thinks some good suitors include Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), SC Johnson, Unilever, Kimberly-Clark (NYSE:KMB) and Reckitt Benckiser. He thinks a sale price could reach as much as $100 a share.
However, this may be too optimistic, and there is perhaps a bigger problem for a potential deal in antitrust concerns.
In light of the valuation and the uncertainty of a deal – as well as some of the economic headwinds — the cons outweigh the pros on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.