It is impossible to walk through a grocery store's household product section and not see a well known brand product made by Clorox (CLX).
Do you recognize any of these brand names - Clorox, Glad, Hidden Valley Kingsford? Through the rough economic conditions and anemic recovery over the last five years, it seems consumers have consistently bought Clorox products - willing to buy "value added" products at a higher price from this well-known name brand.
According to a report by MorningStar, the company has been able to raise prices numerous times as well as add value to products without hurting sales:
- Since 2005 the company has increased prices 66 times.
- 64 of those price increases are still in place.
- Sales of Glad premium trash bags (Glad OdorShield & Febreze scented) have held up even in the struggling economy proving consumers are willing to pay added value for the company's products.
Compare this to another well-known company that also deals in consumer goods. Procter & Gamble (PG) saw a significant dip in profits in early 2009 when it misjudged American consumers and raised prices on some of its well-known flagship products. You may be familiar with some of the laundry detergent names like Tide and Cheer. When the company raised prices, consumers didn't bite but gravitated toward lower-priced laundry products. The company had to admit it misjudged the market and lowered its prices in an attempt to gain market share back.
If we observe the gross profit for Clorox and its two largest competitors, Proctor & Gamble and Johnson & Johnson (JNJ), the company has held its own. Over the last three years, Clorox has seen its gross profit climb by 6.1% while the other two companies have seen growth of 1.9% and 6.4% respectively. The company may be smaller but its products can compete with its biggest competitors.
Not only have sales remained strong, its "Gross Profit to Asset Ratio" reveals that it remains a company with good growth potential. This ratio, even though it is not used that often, can indicate a company has a high level of profitability. The higher this ratio is, it indicates that a business is doing financially well and could possibly make a very good investment. Keeping our comparison to Clorox's much larger rivals, its gross profit sales ratio is much higher than PG's and JNJ's.
The company is not without its own pressures.
I guess the greatest challenge to a smaller company like Clorox would be the abundance of private-label offerings that it must compete with. If you are unfamiliar with the terminology, 'private-label offerings' means a certain product is sold under the name of a different wholesaler or retailer, arranged by the manufacturer. In every category the company competes in, consumers have multiple choices to pick from. This makes competition and pricing very competitive.
Nevertheless, some analysts believe the company will continue to perform well like it has in the past.
- Top-line growth of 3.3% in 2014
- Long-term sales growth of 4.2%
- Forecasted operating margins to expand by 19% by 2023
- ROI should average 25%
Clorox, a David among giants, continues to hold its own with high quality products. Consumers are familiar with its products and continue to buy them. Sales have increased the last three years and the company has a nice dividend at 3.3% - better than JNJ (2.9%) and PG (3.0%). The company is a good long-term dependable income producer that investors should consider looking at to add to their portfolio.
Author's Note: All financial figures from companies mentioned in this article put in spreadsheets were taken from Yahoo Finance.