Clorox (NYSE:CLX) didn’t have a clean fiscal third-quarter report. Net income came to $132 million, or $1.01 per share, which was down from $151 million, or $1.09 per share, from the same period a year ago. Wall Street expected EPS of $1.03. The stock price closed off by 3.2%, at $67.80 in Wednesday trading after the earnings. In early Thursday trade, it’s still drifting lower, by some 0.7%.
The big disappointment was the guidance. For fiscal 2013 — which starts in July — Clorox says net income will range from $4.20 to $4.35 per share. The consensus was for $4.40 per share.
It’s not a good sign, but it’s also not a big drop either. So, might Clorox shares be a bargain for investors? To decide, let’s take a look at the pros and cons:
Strong Brand Portfolio. Clorox has a stable of a world-class brand. Some of its names include household products Fresh Step, Kingsford, Hidden Valley, Brita, Glad and Burt’s Bees. Many of these have to No. 1 or No. 2 spots in their categories. With its brand power, Clorox has been able to maintain premium pricing for its products.
New Markets. Clorox has been buying companies in the health care sector — such as HealthLink and Aplicare — that focus on areas like infection control. These operators are growing at 8% to 10% rate per year and have promising long-term futures, especially as the U.S. population ages.
Dividend. The yield is at an attractive 3.4%. In light of Clorox’s strong cash flows, the payout looks pretty safe.
The Consumer. Brands are certainly important, but they still may not be a cure-all. Given slow economic growth, consumers are looking for ways to save money. At the same time, there has been a trend towards private-label offerings.
Dependence. Clorox relies on a limited number of customers for its products. For example, Wal-Mart (NYSE:WMT) accounts 26% of sales. In fact, five customers represent 44% of sales. In other words, they have the potential to use their leverage to get better terms.
Gross Margins. Clorox’s full-year forecast is for a decline of 1.25% to 1.5%. The prior guidance was 0.5% to 0.75%. No doubt, this is a big drop for a company with Clorox’s scale. Some of the reasons include rising commodities prices and changes in the product mix. It also looks like the company faces more competition, especially in foreign markets.
Last year, billionaire investor Carl Icahn bought a large equity stake in Clorox and tried to gin up interest from potential suitors. He thought there would be interest from operators like Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), SC Johnson, Unilever, Kimberly-Clark (NYSE:KMB) and Reckitt Benckiser. But it turned out to be a misfire.
Then again, Clorox does face some headwinds. Perhaps the biggest is the slow U.S. economy. Consider that about 79% of sales come from the U.S.
So, even though Clorox has a strong dividend and financials, there appear to be no major catalysts to get the stock price moving upwards. All in all, the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.