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Clorox: Navigating Market Challenges with a Resilient Brand Portfolio.

Opdateret: 14. jun.

Clorox is renowned for its bleach and disinfectant products, but it also provides a diverse range of consumer staples in various other categories. Consumer staples are generally considered a dependable investment during periods of economic uncertainty. The question is whether Clorox is a good investment. This is what I will investigate in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Clorox. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Clorox' competitors either. Thus, I have no personal stake in Clorox. If you want to purchase shares or fractional shares of Clorox, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Clorox was founded in 1913 in California, United States, as the first commercial-scale liquid bleach manufacturer in the country. The Clorox Company is a prominent multinational manufacturer and marketer of consumer and professional products, including bleach, cleaning and disinfecting products, clog removers, home care products, bags and wraps, cat litter, grilling products, dressings, dips, seasonings and sauces, natural personal care products, water-filtration products, and vitamins, minerals, and supplements. Clorox owns the following brands: Clorox, Pine-Sol, Tilex, Liquid-Plumr, Poett, Glad, Fresh Step, Kingsford, Hidden Valley, Burt's Bees, Brita, Natural Vitality, RenewLife, NeoCell, and Rainbow Light. The company has four operating segments: Health and Wellness (37% of net sales), Household (28% of net sales), Lifestyle (18% of net sales), and International (17% of net sales). Clorox operates in over 100 markets across 25 countries. Clorox's brands are well-known, and approximately 80% of the company's sales come from brands that hold the No. 1 or No. 2 market share positions in their respective categories. This means that 9 out of 10 American homes have at least one Clorox product. Therefore, the popularity of the Clorox brands is what gives Clorox a brand moat.

Their CEO is Linda Rendle. She joined Clorox in 2003 and held various senior leadership positions before assuming the role of CEO in September 2020. Before joining Clorox, Linda Rendle worked for The Procter & Gamble Company, where she held various positions in sales management. Linda Rendle also serves on the board of directors of Visa Inc. and the Consumer Brands Association. She has earned a bachelor's degree in economics from Harvard University. Linda Rendle's extensive tenure at the company has provided her with a profound understanding of the consumer packaged goods industry and the company's operations. She was selected as the CEO due to her impressive track record of delivering outstanding business results, her effective oversight of the development of the company's IGNITE strategy, and her leadership guided by strong values. Linda Rendle was appointed as Chair of the board of directors in 2024 due to her exceptional leadership at Clorox since becoming CEO. She has strengthened Clorox's competitive position through digital and organizational transformation. She mentioned that she didn't see herself becoming a CEO because she describes herself as a super-big introvert. However, she learned that being a terrific listener was a really important quality in a CEO. Unfortunately, her employee rating at Comparably is only 62 out of 100, placing her in the bottom 30% of companies of similar size. However, it should be mentioned that it is based on only a few employee respondents. I admire Linda Rendle's extensive experience in the industry and the fact that she did not have aspirations to become a CEO but achieved the position based on her results. Her employee rating is slightly concerning, but it is based on a small number of respondents. It's also worth noting that during her brief tenure as a CEO, she had to navigate through a pandemic and macroeconomic headwinds. Overall, I am confident in Linda Rendle as the CEO.

I believe that Clorox has a strong brand moat, and I have confidence in the management as well. Now, let's analyze the numbers to determine if Clorox meets our criteria for having a strong competitive advantage. If you need an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first metric we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures demonstrating growth of over 10% for each year. Historically, Clorox has achieved a high Return on Invested Capital (ROIC). However, it is concerning that the return on invested capital (ROIC) has decreased since 2017, when Clorox managed to achieve its highest ROIC in the past 10 years. Clorox acquired Nutranext Business, LLC for approximately $700 million in 2018. This acquisition may explain the decrease in ROIC from 2018 and onwards. Furthermore, Clorox has been affected by a pandemic and macroeconomic factors. Nonetheless, achieving a ROIC of 5,5% in fiscal year 2023 is underwhelming. I would like to see a return to historical levels of ROIC.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Clorox's financial performance is somewhat volatile, with some years showing significant increases and others showing significant decreases. The fiscal 2023 numbers are underwhelming, and it seems like it has been a challenging year for Clorox. You will read why later in the analysis. One bad year doesn't necessarily disqualify a company as an investment, but I would like to see improving equity in the future.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising to note that Clorox has consistently generated positive free cash flow each year for the past decade. When examining the actual numbers, it is encouraging to see that Clorox managed to deliver one of the highest levels of free cash flow in fiscal 2023, despite the challenging macroeconomic factors. The levered free cash flow margin is also higher than the previous year and is consistent with historical figures. The free cash flow yield is also in line with the historical average and higher than the previous year. This indicates that Clorox shares are neither cheap nor expensive, but we will revisit this later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Clorox, I found that the company has 16,62 years of earnings in debt. It is significantly higher than I would prefer, primarily because the earnings were much lower in fiscal 2023 due to a non-cash impairment charge in the Vitamins, Minerals, and Supplements business. Therefore, it does not provide an accurate representation of the debt. For example, when we divide the long-term debt by the free cash flow, the company has 2,66 years' worth of earnings in debt. Thus, the debt is not as alarming as it appears at first glance. Therefore, debt is not a significant concern for me if I were to invest in Clorox.

Based on my findings thus far, I find Clorox to be an intriguing company. However, no investment is without risk, and Clorox also has its fair share of risks. One risk is macroeconomics. In its annual report, Clorox mentions that unfavorable general economic factors beyond their control have materially adversely affected their business, results of operations, financial condition, and liquidity, and could continue to do so. The uncertainty surrounding the economy has impacted consumer spending. Management has indicated that they anticipate the operating environment to remain challenging, as consumers continue to experience financial pressure and exhibit value-seeking behaviors. While Clorox's products are generally resilient, management has indicated that there will be a moderate impact on their categories. Competition. In the annual report, Clorox mentions that the consumer products markets are highly competitive. The company's products compete with other nationally advertised brands and with private label brands within each category. Furthermore, they mention that heightened competitive activity is expected due to high inflation and reduced purchasing power among consumers. This indicates that consumers may prioritize private label products, which are less expensive than Clorox's branded products. Depending on a few customers. Clorox states that a small number of customers contribute to a significant portion of the company's net sales. Net sales to the company's largest customer, Walmart, and its affiliates accounted for 26% of total sales in fiscal year 2023, and were distributed across all of the company's reportable segments. Furthermore, the company's five largest customers accounted for nearly half of the company's consolidated net sales for fiscal year 2023. If Clorox's relationship with any of these customers ends, it will impact Clorox's business. Although it may seem unlikely, events such as the cyberattack that Clorox experienced in August 2023 could potentially affect the company's relationship with retailers.

There are also numerous reasons to invest in Clorox. One reason is that they represent positive trends. There are numerous positive trends that will benefit Clorox. Some of these trends include an increase in cat adoptions, which indicates positive momentum for the litter industry. There is a growing interest in disinfecting and management has stated that data confirms that this trend continues today. People still have a heightened need to have their spaces cleaned and disinfected. Furthermore, people are generally taking better care of their health and wellness. Therefore, products like Brita water filtration and Clorox's Vitamins, Minerals, and Supplements business have natural tailwinds. Higher profit margins expected in the future. Clorox's margins have decreased in the past years due to macroeconomic factors. However, management is optimistic about increasing margins over the next couple of years. They have mentioned that they expect to make solid progress in fiscal 2024 and anticipate this trend to continue into fiscal year 2025. Management anticipates that the gross profit margin will increase from 39% to 42% in fiscal 2024 and reach 44% in fiscal 2025. Furthermore, management has mentioned that one of their goals is to expand EBIT margins by 25 to 50 basis points per year in the long term. The IGNITE strategy. Clorox's management aims to grow the business through the IGNITE strategy, which seeks to balance the delivery of short-term results with the company's long-term vision. The management's approach to fueling growth is through cost savings and leveraging technology. Leverage data to create insights that drive innovation and build purpose-driven, personalized brands. Reimagine work by simplifying the company's operations, leveraging technology, and moving more quickly to drive growth. Evolving the portfolio by emphasizing consumer megatrends, including sustainability, and continuing to focus on enhanced wellness, while also expanding their core business.

Now it is time to calculate the share price of Clorox. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,16, which is the guidance for fiscal 2024. I have selected a projected future EPS growth rate of 9% (Finbox expects EPS to grow by 8,4% annually from 2025 to 2029). Additionally, I have selected a projected future P/E ratio of 18, which is twice the growth rate. This decision is based on the fact that Clorox has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $33,28. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Clorox at a price of $16,64 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 1.158 and capital expenditures were 228. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 160 in our calculations. The tax provision was 52. We have 124 outstanding shares. Hence, the calculation will be as follows: (1.158 – 160 + 52) / 124 x 10 = $84,68 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Clorox's free cash flow per share at $7,52 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is $90,40.

I find Clorox to be an intriguing company, and I have confidence in its management, despite the low employee rating. Clorox is currently facing short-term risks due to macroeconomic factors, which may lead customers to choose less expensive private label products. However, once the economy improves, I believe that customers will continue to prioritize Clorox's products, as they have done for more than a century. Competition will always pose a risk because Clorox operates in a highly competitive market. However, the strength of the brand and its long history give me confidence that Clorox will continue to perform well in a competitive market. Relying on a small number of customers is common in the United States when operating in the consumer staples industry. I don't think these major customers will stop selling Clorox's products due to the popularity of these items. However, if Clorox experiences another cyberattack, it could impact the relationship. Therefore, it is something that requires monitoring. I believe there are numerous trends that will benefit some of Clorox's businesses for many years to come, and the management appears to have a clear plan on how to improve margins in the short term, which is encouraging. If management succeeds with the IGNITE strategy, it could result in long-term gains for Clorox, which I believe is the most compelling reason to invest in Clorox. The Clorox company's fiscal 2023 numbers were impacted by a non-cash impairment charge in the Vitamins, Minerals, and Supplements business. Nonetheless, I will need to see Clorox deliver a higher return on invested capital (ROIC) before considering investing in the company. Therefore, I will not be investing in Clorox at this point.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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