Clorox Balanced on Risk-Reward

Mar.30.11 | About: The Clorox (CLX)

We have maintained our long-term 'Neutral' recommendation on Clorox Corporation (NYSE:CLX) with a target price of $73.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock.

Clorox is primarily engaged in the production, marketing and sales of consumer products in the U.S. and international markets. The company sells its products primarily through mass merchandisers, grocery stores and other retail outlets.The company manufactures products in more than 24 countries and markets them in more than 100 countries.Furthermore, the company possesses a strong portfolio of brands, including Clorox, Glad, Brita, Armor All, Burt’s Bees, STP and Kingsford, whichoffer a competitive edge to the company and bolster its well-established position in the market.

Moreover, Clorox has identified its financial goals to measure its progress. These goals include 3% to 5% annual sales growth excluding acquisitions and 75 to 100 basis points of annual improvement in operating margin. Additionally, the company plans to carefully manage the growth of its asset base. Management believes it can realize double-digit economic profit growth and free cash flow of 10% to 12% of net sales provided these financial goals are met.

Furthermore, inJanuary 2010, the company acquired assets of Caltech Industries, which provides disinfectants for the health care industry, for an aggregate price of $23 million. Clorox intends to expand its capabilities in the areas of health and wellness through this acquisition.

In addition, the company has a consistent track record of returning cash to shareholders in the form of regular dividend payments. During fiscal 2008, 2009 and 2010, the company utilized cash reserves of $228 million, $258 million and $282 million, respectively, toward dividends.

However, Clorox has a highly leveraged balance sheet with a long-term debt of $2,425.0 million and a long-term debt-to-capitalization ratio of 95.1% at the end of the second quarter of fiscal 2011. The high debt level adversely affects the company's financial flexibility and its ability to pursue acquisitions or expand operations organically.

Besides, Clorox operates in an intensely competitive environment. The resurgence of archrival Procter & Gamble Company (NYSE:PG) has signaled new challenges. The company also faces intense competition from other domestic personal care products companies such as Colgate-Palmolive Company (NYSE:CL) and Church & Dwight Company Inc. (NYSE:CHD). Moreover, global competition has also intensified. Consequently, risk associated with operating in such a competitive environment may undermine the company's future operating performance.