We maintain our long-term Neutral recommendation on The Clorox Company (CLX), one of the world's leading manufacturers of consumer products, based on a balanced risk-reward scenario for the company.
The neutral view on Clorox stems from the company’s solid third-quarter performance in a difficult economy and despite higher input costs, the benefits of its ongoing cost saving initiatives and price increases, encouraging forward guidance and intensive capital investments, offset by intense competition, a highly leveraged balance sheet and foreign currency effects.
Despite macroeconomic headwinds and higher input cost, Clorox posted third-quarter 2012 earnings of $1.04 per share that beat both the Zacks Consensus Estimate and the prior-year period earnings by a penny. The encouraging results were driven by benefits from cost saving initiatives and price increases. Driven by volume growth and contributions from new businesses acquired, sales increased 7% from the prior period.
Based on robust quarterly performance, management now expects sales growth of 4% in fiscal 2012, up from 2% to 4% forecasted earlier. Clorox has also established long-term financial goals to measure its progress. These goals include 3% to 5% annual sales growth before acquisitions, and 75 to 100 basis points of annual improvement in operating margin.
Additionally, the company has plans to carefully manage the growth of its asset base. Clorox is cautiously managing its asset value and focusing on realizing double-digit economic profit growth and free cash flow of 10% of net sales in fiscal 2012.
Further, the company is constantly looking for acquisitions and alliance opportunities to boost its market share and product portfolio. Clorox is making intensive capital investments in information technology systems and capabilities, particularly in the international market and R&D facilities to boost productivity while providing platforms for growth, product innovation and cost savings. The company believes that these initiatives will begin delivering benefits later in fiscal 2014 and beyond.
On the flip side, has a highly leveraged balance sheet with long-term debt of $1,570 million at the end of first quarter of fiscal 2012. The high debt level may adversely affect the company’s financial flexibility as well as the ability to pursue acquisitions or expand operations organically.
The company faces intense competition from well-established consumer product companies, both in the U.S. and international markets. Clorox competes head-to-head with Colgate-Palmolive Company (CL) and Procter & Gamble Company (PG).
Moreover, the company’s performance may be affected by its significant presence in international market (approximately 21% of revenue), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.
Currently, Clorox has a Zacks #4 Rank, implying a short-term Sell rating.
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CLOROX CO (CLX): Free Stock Analysis Report
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