Clorox Cleans Up, But Shine May Not Last

| About: The Clorox (CLX)
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The Clorox Company (NYSE:CLX) reported earnings this morning that were solidly higher than what Wall Street was expecting, but the real news is what is Carl Ichan going to do with the company?

The Oakland-based company reported fourth quarter earnings of $1.26 per share on $1.48 billion in revenues. Wall Street analysts had been expecting earnings of $1.19 per share on $1.47 billion in revenues.

"I'm really pleased with our strong finish to fiscal year 2011," said Chairman and CEO Don Knauss. "Despite the ongoing effects of the recession, we delivered very good results in the second half of the fiscal year, much as we'd been expecting, with sales increasing 3 percent, net earnings from continuing operations growing 6 percent, and diluted EPS from continuing operations up 11 percent. This solid performance was led by our portfolio of leading brands, which achieved its highest ever all-retail outlet market share of 27.9 percent, up 1.4 share points since fiscal 2008, the strongest performance of any branded player or private label in our categories. This performance was driven by our strong '3D' demand creation model. We've also now met or exceeded our annual innovation target of 2 percentage points of incremental sales growth from new products for the ninth consecutive year."

Knauss continued, "Building on this attractive top-line performance, our returns to stockholders have been enhanced by our cost-saving initiatives, which resulted in close to $110 million of savings this year, as well as our fiscal year 2011 distribution of nearly $1 billion to our stockholders through dividends and share repurchases. We have the right people, brands and capabilities to successfully execute our Centennial Strategy. We've consistently achieved growth in earnings per share, increased market shares, delivered strong cash flow performance and returned excess cash to stockholders."

The major issue at hand here is the situation with Carl Icahn. It appears this is not going to be resolved anytime soon. Icahn first announced his stake in the company back in February, and over the past few months, he has offered to take the company private twice. No one believed his $76.50 per share offer, and no one believed it when he upped his offer to $80 per share.

Icahn is trying to drum up interest in the name, most likely from a strategic buyer, such as Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).

There probably is significant private market value in Clorox, as some have said that on a going private basis, Clorox is worth more than $100 per share. The problem it seems, is that there does not appear to be any interest from any of the parties that Icahn has identified as potential suitors. Clorox, at over $9 billion, is a big pill to swallow for some of the consumer staple names.

The company trades at 17.1 times 2012 earnings, and sports a 3.4% dividend yield.

Eventually, shareholders may "clean up" on this deal, but they may have to go through the "Hidden Valley" before coming up smelling like Pine-Sol.



Traders who believe that Clorox will ultimately get taken private might want to consider the following trades:

  • Consider buying long dated calls on Clorox, as this situation could continue for an extended period of time. Icahn may eventually win out, but with Clorox implementing a poison pill, a victory will not come anytime soon.


Traders who believe that Clorox will not get bought may consider alternate positions:

  • Short Clorox. The sole reason that Clorox needs to be bought is the management team is not effectively marketing and expanding internationally. If a deal does not consummate, shares could fall, despite no M&A premium in the stock.

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