by Will Ashworth | February 7, 2013 9:35 am
Clorox (NYSE:CLX) — the company behind its namesake cleaning products and a host of other consumer products — delivered solid second-quarter earnings Feb. 4. Among the good news was beats on both the top and bottom lines, as well as the upping of its guidance for fiscal 2013.
CLX stock is running hot, trading within 1% of an all-time high. So should you buy Clorox right now — or give it some time to cool off? To see, we’ll look at the pros and cons.
Earnings: Diluted earnings per share increased 18% year-over-year to 93 cents on 9% sales growth and 5% volume growth. For the first six months of the year, revenues were $2.66 billion with diluted EPS of $1.94. Helping profitability in the quarter was a 100-basis-point increase in its gross margin to 42.5% thanks to cost savings and higher prices. One of the biggest attractions of consumer staples’ companies such as CLX is their pricing power, which protects against inflation. Clorox definitely has it.
Cleaning Segment: The biggest of Clorox’s four operating segments in terms of revenues and operating profits, it’s also experiencing the fastest growth. The cleaning segment is itself divided into three units: Home Care, Laundry and Professional. The biggest growth driver in the quarter was Clorox’s disinfecting wipes, which were in major demand due to the severity of the flu season. Other brands that investors are familiar with in this segment include Pine Sol, Tilex and Green Works. Revenues in Q4 increased 15% to $425 million with pre-tax earnings jumping 28% to $100 million.
Outlook: Clorox’s prospects for the remainder of the year appear strong. Management’s guidance calls for 3% to 5% sales growth in 2013, up from earlier guidance of 2% to 4%. In terms of profits, it expects its earnings-before-taxes margin to improve by at least 25 basis points, leading to EPS of at least $4.25. Long-term, Goldman Sachs (NYSE:GS) expects 2015 EPS of $5.05, an increase of 9% over each of the next two years. While not spectacular, it’s steady enough.
International Business: Clorox’s business in Latin America and Canada underperformed in the second quarter, with sales volumes in those two regions contributing to an overall decrease of 3% year-over-year. Even worse was its profitability. Earnings declined 24% to $25 million in the quarter and by 27% in the first six months of the year to $53 million. With international revenues accounting for just 23% overall, the impact on its business is somewhat muted.
Brand Diversification: Clorox has a lot of interesting brands besides its namesake — and that’s as much a curse as it is a blessing. Its Household segment (Kingsford charcoal, Fresh Step cat litter, and Glad garbage bags) accounts for 31% of its overall revenue. There’s really no synergy between the three categories, suggesting a lack of focus has crept into its business as a byproduct of growth in recent years. Take, for example, the 2007 acquisition of Burt’s Bees. The products are first-rate, but what does it add to the business model? Clorox generates almost half its revenue from very disparate products whose only common thread is that they can be found in your home. A little tightening of its focus would be helpful.
Valuation: As I mentioned in the opening, CLX is trading near its all-time high of $80.86. With such a lofty price, most of its valuation metrics are not surprisingly at or near historical highs. The one that stands out for me is its forward 2015 P/E of 16, which is based on a Feb. 6 closing price and $5.05 in earnings per share. That’s not horrible until you consider that you can buy either Procter & Gamble (NYSE:PG) or Colgate-Palmolive (NYSE:CL) for approximately the same multiple, while also securing a greater global presence. It’s not a deal-breaker, but at nosebleed prices it’s something to consider.
As a group of brands, I like what Clorox brings to the table. As a company, I’m less certain that it has a laser-like game plan. Unilever (NYSE:UL) is focusing solely on personal care products while unloading food businesses like Skippy. It no longer wants to be all things to all people.
Ultimately, I think Clorox gets bought out. By whom? That I can’t answer. However, if it wants to compete effectively in emerging markets, it needs to be bigger. Unfortunately, its current net debt-to-EBITDA is higher than almost all of its peers, making the exercise incredibly difficult.
So, should you buy Clorox? Probably — but at $70, not $80.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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