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Summary

  • Company’s international segment remains important growth driver.
  • Stock offers safe dividend yield of 3.2%.
  • Price target calculations reveal that stock offers 10% upside potential.

The Clorox Company (NYSE:CLX), with its portfolio of staple consumer products and strong brand names, is well positioned in the consumer staple sector. The company's international segment, with 21% of total sales in FY13, is geared up for positive results in volumes and sales growth. However, currency headwinds remain a threat to the company's overall revenue base. In its efforts to support the long term growth prospects with immense advertisement and manufacturing expenditures; the company faced pressure on its margins. However, growth initiatives will portend well for CLX in the long run. The company remains investor-friendly with its share buybacks and attractive dividend yield of 3.20%. Moreover, the stock offers an upside stock price potential of 10% based on my stock price target of $99. Therefore, I am bullish on CLX.

CLX, the manufacturer and marketer of consumer and professional products, operates internationally and in the U.S with household, lifestyle and cleaning segments. The following chart shows the segments' contribution towards the company's total revenues.

(click to enlarge)

Source: Company's Annual Report

Mixed trends from 2QFY14

The company reported mixed financial results for 2QFY14. The growth potential in international markets helped CLX's international segment generate volume growth, largely supported by gains in Argentina, Canada and the Middle East. Moreover, sales growth of 2% year-on-year in 2QFY14 was driven by the increase in volumes and prices in emerging markets. However, currency movements remained a headwind for the company. The currency devaluations from Venezuela and Argentina remain the major threat to CLX's international segment revenue and profit base.

However, the company has lower exposure to currency headwinds, as it generates approximately 21% of its total revenues from international markets, as compared to Colgate (NYSE:CL), who generates 75% of its total revenues from international markets. The company has lowered its 2014 outlook for sales to 1%-2%, anticipating currency challenges, but it will realize long term growth potential of international markets, which I believe will definitely serve the top line revenue base of CLX. The following table shows the growth trends of sales, volumes, margins and price/mix for CLX.

3QFY13

4QFY13

1QFY14

2QFY14

Volume (Y-O-Y Growth)

1%

(6%)

0%

2%

Sales (Y-O-Y Growth)

1.7%

(1%)

(2.6%)

1%

Margins (Y-O-Y Growth)

(0.5%)

(0.6%)

0.3%

1.5%

Price/Mix (Y-O-Y Growth)

4%

9.5%

4.4%

7%

Source: Company's Quarterly Earnings Report

2QFY14 did not end so well for the U.S. segment, as the drag on sales and volumes of household and lifestyle segments counterbalanced the double-digit increase in sales and volumes of the cleaning segment. Moreover, the increasing competitive pressure from peers Procter & Gamble (NYSE:PG) and Colgate was a strain on the company's U.S. segment's financial performance. However, the cleaning product giant that is CLX in the U.S, with overall demand building support and gains in both professional and personal care, ended 2QFY14 vis-à-vis its cleaning segment's results on a positive note. Moreover the recent shift of large retailers like Wal-Mart (NYSE:WMT) towards private label brands adversely affected CLX's sales.

However I believe CLX has the potential to overcome this threat with its improved quality and innovative future product launches. Moreover CLX's well recognized brands have the ability to outperform the company's competitors. The following table shows sales, volumes, price/mix and underlining margin trends for CLX's U.S. segments:

3QFY13

4QFY13

1QFY14

2QFY14

Volume (Y-O-Y Growth)

(0.9%)

(1.9%)

1.5%

0.7%

Sales (Y-O-Y Growth)

0.6%

0.7%

3.3%

0.2%

Margins (Y-O-Y Growth)

(0.9%)

0.9%

0.2%

(1.5%)

Price/Mix (Y-O-Y Growth)

1.5%

2.8%

1.8%

(0.5%)

Source: Company's Quarterly Earnings Report

Value Adding Stock

CLX proved its investor-friendly credentials by returning more than $2 billion in cash to stakeholders over the last five years through share repurchases and dividends. The company has purchased $696 million shares for the three year period ending at 2013, however if it continues buying back shares at this rate it will make up almost 2% of its market cap each year. CLX's dividend yield of 3.20% is relatively higher as compared to key players including PG and CL; this makes the stock stand out as an attractive dividend growth stock for investors. CLX's dividend base is completely secure with its strong FCF base. I believe the stock will continue to deliver more dividends for investors in the coming future with a strong dividend base. The following chart shows the dividend yield comparison of CLX with PG and CL.

(click to enlarge)Source: Bloomberg Business Week (CLX, PG, CL)

The following chart shows FCF available against dividends paid.

(click to enlarge)

Source: Company's Quarterly Reports

Price Target

I have used cost of equity 8.1%, after tax cost of debt 4.4%, WACC 7.3% and a nominal growth rate of 2.5%. CLX's stock, based on my price target calculation of $99, offers a price appreciation of 10%.

2015

2016

2017

Terminal Value

FCF ( in $-Millions)

691

732

777

16,592

Present Value (in $-Millions)

643

637

629

13,440

Source: Equity Watch Estimates and calculations

Total Value of Firm = $643 + $637 + $629 + $13,440

= $15,349

Market Value of Debt = $2,510

No. of Shares Outstanding = 129.91

Market Value of Equity = $15,349 - $2,510

= $12,839

Price Target = $12,839/129.91

= $99

Conclusion

The company has been delivering satisfactory financial performance in the recent past. The company's international segment remains an important growth driver for the company despite the ongoing currency headwinds. Also, the stock remains an attractive investment option for dividend investors, as it offers a safe dividend yield of 3.2%. Moreover, based on my target price of $99, the stock offers an upside potential of 10%. Due to the aforementioned factors, I am bullish on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Current Headwinds Fail To Bring Down Clorox; Stock Earns Bullish Rating