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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Clorox Company: Cash Flow Valuation Update 0 comments
    Sep 14, 2012 8:16 PM | about stocks: CLX

    Current Price: ~ $71/share
    Yield: ~ 3.46%

    For nearly 100 years, Clorox has operated in the household product industry, expanding its portfolio to include such leading brands as Clorox, Glad, Hidden Valley, and Kingsford. The firm distributes its products through mass merchants, grocery stores, and other retail outlets. With its acquisition of Burt's Bees in 2007, Clorox gained entry into the fast-growing natural personal-care category. International sales amount to 20% of the firm's consolidated total.

    Estimated WACC for the firm today is 5.08% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2003598
    2004727
    2005614
    2006342
    2007562
    2008560
    2009541
    2010616
    2011470
    2012420

    (click to enlarge)

    Average Annual Growth FCF: ~ 0%

    CAGR FCF: ~ -4%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year

    Consensus Forecast Company 5-Year Growth: ~ 8% per year

    Internal Growth Rate: ~ 5.5%

    Scenario 1

    • Start at $420 million FCF
    • Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0420
    1454
    2490
    3529
    4571
    5617
    Terminal Value13121

    The firm's future free cash flows, discounted at a WACC of 5.08%, give a present value for the entire firm (Debt + Equity) of $12524 million. If the firm's fair value of debt is estimated at $2606 million, then the fair value of the firm's equity could be $9918 million. $9918 million / 130 million outstanding shares is approximately $76 per share and a 20% margin of safety is $61/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 4% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0420
    1437
    2454
    3472
    4491
    5511
    Terminal Value10462
    • Present Value of the entire firm (Debt + Equity): $10203 million
    • Value of Equity: $7597 million or $58/share
    • 20% margin of safety is $46/share

    Sources

    Morningstar.com

    Yahoo! Finance

    The Clorox Company

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: CLX
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