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The Cloros(CLX) – Rise and Shine

The Clorox Company manufactures and markets consumer and professional products worldwide. It operates through four segments: Health and Wellness, Household, Lifestyle, and International. 

Market Cap: $17b S&P rating: BBB+

What happened with Clorox? Why are we seeing on the chart a big decline since July 2020?

“Shares of Clorox were falling sharply Friday after the maker of disinfectant wipes and other cleaning products reported fiscal second-quarter adjusted earnings that missed analysts’ expectations and said margins would take a steep hit from continued cost pressures.”

This was the latest news about Clorox and about the price fall in February. After I did some research it became very clear that this problem has appeared first in the third quarter of 2020. That’s why the price is declining. 

The current situation and the past performance…

So the first thing we want to look at is the current P/E, which is 32.43. It is surprisingly high. First, I like the P/E under 25, secondly, the price like I just wrote is beaten down so it is a surprise to me that the P/E after all this is that high. 

The gross profit is up year after year, it is growing slowly but steady. EBITDA is growing. 

If we look at the chart from a classic view standpoint then the last 20 years brought us an 8.6% Total Annual Return which is very good in my opinion + the dividends. The stock price is above the Margin of Safety (orange line) since 2010 but right now they are getting closer again. A small growth rate for a company like this is acceptable.

From a dividend standpoint…

I see a good opportunity in CLX because of the dividend. It wasn’t at this level since 2012. I find it to be very attractive. So the current dividend yield is 3.32%. Comparing this to the 5-year average yield is also a positive point; the 5-year average yield is 2.41%. CLX has a dividend record of 45 years! 

Here is the perfect opportunity to buy in CLX! Buy some shares before 26.04.2022 which is the Ex-Div Date and you will get your first quarter of this juicy dividend. 

 The payout ratio was around 60% last year and it was always at this level. I like to see this ratio under 75%, so this is a checkmark for me! The overall raise every year is about 6-7% on average. If I add the raise and the current yield together then I get a 9-10% overall expected return. Awesome!

 Share buybacks can be a silent killer for your investment. If a company issues shares over and over again then your investment will be worthless over time. In other words, your slice of the cake will be smaller. CLX does a good job also here. They are buying back shares every year.

2021202020192018
127,299127,671129,792131,581

Debt

CLX has a net debt to equity ratio of 584% which is very high but on the long-term debt side, the ratio is only 61% which is more likable. They reduced the debt to equity ratio by more than 400% in the last 5 years! And the debt is well covered by the operating cash flow. 

I’m not that worried about the debt after all.

Forecasting

Based on 8 analysts the estimated future earnings growth rate is +5.1%. Analysts have a scorecard also which tells me that they are 54% of the time right about the estimates and 38% of the time CLX has beaten the estimates.

Fair Value

I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.

(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $6.972+ $22.483 = $29.455

Equity Value per Share (USD) = Total value / Shares Outstanding = $29.455 / 123 = $239.36)

Undervalued by 41.6%. The current fair value is $239.36.

Risks and overall takeaway…

The current situation between Russia and Ukraine makes the whole situation worse. Inflation and the cost of living will be more expensive than before. This puts pressure also on CLX and companies like them. We don’t know if the price will fall more and more or it stops here but what I can tell you after my research; is if you buy right now, you will get a bargain price for this company. Like I just said, maybe the price will fall below this level but overall after the world will function again CLX will rise again. Until then, collect the juicy dividend yield and enjoy life!

Disclosure: I have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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