Clorox is renowned for its bleach and disinfectant products, but it also provides a diverse range of consumer staples in various other categories. And while it may not sound like the most exciting investment, consumer staples are generally considered a dependable choice during periods of economic uncertainty. The question is whether Clorox is a good investment. This is what I will investigate in this analysis.
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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 five operating segments: Health and Wellness (35% of net sales), Household (28% of net sales), Lifestyle (18% of net sales), International (16% of net sales), and Corporate & Other (3% of net sales). Clorox operates in over 100 markets across 25 countries. Clorox has a portfolio of superior brands that they continue to invest in. These 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 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 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. In 2024, she was appointed as Chair of the board of directors due to her exceptional leadership at Clorox since becoming CEO. She has strengthened Clorox's competitive position through digital and organizational transformation. Interestingly, Linda Rendle 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. While her employee rating at Comparably is only 62 out of 100, placing her in the bottom 30% of companies of similar size, it should be noted that this rating 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 initially aspire to be 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, and it's worth noting that her tenure as CEO has coincided with significant challenges, including a pandemic and macroeconomic headwinds. Overall, I am confident in Linda Rendle's leadership as 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. Ideally, we want to see a 10-year history with all figures exceeding 10%. Historically, Clorox has achieved a high Return on Invested Capital (ROIC), but there are some concerning trends. The company's ROIC peaked in 2017, where Clorox delivered its highest ROIC over the past decade. However, since then, ROIC has steadily declined. In 2018, Clorox acquired Nutranext Business, LLC for approximately $700 million, which may explain some of the ROIC decline from that point onward. The acquisition, coupled with broader challenges like the pandemic and ongoing macroeconomic headwinds, has weighed on the company’s ability to generate high returns from its capital. ROIC has remained below 20% for the past three years, reaching a concerning 5,5% in fiscal year 2023. It is encouraging to see that Clorox managed to improve its ROIC in fiscal year 2024, reaching 10%, but this is still significantly lower than the historical highs seen prior to 2018. Moving forward, I would like to see Clorox improve its ROIC and ideally return to levels above 20%, which would signal that the company has regained its capital efficiency and profitability.
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 equity has experienced some volatility, with certain years showing notable increases and others displaying significant declines. It is not surprising that Clorox reached its highest equity in fiscal year 2020, which was during the pandemic, a period when demand for disinfectant and cleaning products surged. However, since then, the company has faced challenges, leading to fluctuations in its equity levels. It is encouraging that Clorox managed to grow its equity from fiscal year 2023 to fiscal year 2024. However, when excluding 2023, the equity in fiscal year 2024 remains the lowest since fiscal year 2016. This suggests that while there has been some recovery, the company is still working to regain the higher levels of equity seen in previous years. Hopefully, we will see continued growth and a more substantial increase in equity in fiscal year 2025, which would indicate a stronger financial position moving forward.
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. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. 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 not surprising that Clorox has consistently generated positive free cash flow each year for the past decade, as it operates in the consumer staples sector, which typically provides steady cash flow. However, it is concerning that Clorox delivered its lowest free cash flow and levered free cash flow margin in a decade in fiscal year 2024. Management has cited several factors contributing to this decline, including inflation, which has depressed margins and profits. Additionally, timing issues related to tax payments have impacted free cash flow in both fiscal years 2023 and 2024. Despite these challenges, management expects improvement in fiscal year 2025. They have guided that the levered free cash flow margin will be around 12% in the upcoming fiscal year, which would represent a significant recovery from 2024’s underwhelming performance. While the current numbers indicate that Clorox’s free cash flow is at its lowest point in the last decade, the outlook for improvement is promising. The low free cash flow yield suggests that the shares are trading at a premium price, but this will be revisited later in the analysis as we evaluate the company's future prospects.
Another important aspect to consider is the level of debt, as it is crucial to assess whether a business has manageable debt that can be repaid within a three-year period. This is done by dividing the total long-term debt by earnings. After performing this calculation on Clorox, I found that the company has 8,86 years of earnings in debt, which is significantly higher than what I would prefer. One factor contributing to this elevated ratio is the decrease in EPS due to the divestiture of Clorox's Argentina business. Additionally, productivity enhancements and costs related to the cyberattack that the company experienced in fiscal year 2023 also affected earnings. These factors make the debt level appear more alarming than it might be under normal circumstances. That said, the high debt remains a concern, and I believe it is an important factor that needs to be closely monitored if considering an investment in Clorox.
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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 significant risk is macroeconomics. Clorox is currently facing substantial macroeconomic risks that are impacting its business performance. The company reports that consumers are under increasing financial pressure due to inflation and rising interest rates, leading to more value-conscious behavior. As a result, consumers are shifting towards cheaper or larger-sized products, which has slowed category growth to low single digits. This environment has intensified competition as retailers and brands scramble to maintain or grow their market share. Clorox is also dealing with inflationary pressures, which are driving up costs for essential raw materials, labor, and transportation. This has made it more difficult for the company to rebuild its margins without risking the loss of price-sensitive consumers to lower-priced alternatives. Currency fluctuations are another unpredictable factor that could affect Clorox’s international operations and financial results. In summary, while Clorox continues to adapt to these headwinds, the macroeconomic environment presents significant challenges for the company in terms of sustaining growth and profitability. Competition poses a significant risk to Clorox due to the highly competitive nature of the consumer products market. Clorox faces pressure from both major multinational brands and private label products, which are often sold at a lower price point. As inflation rises and consumer purchasing power diminishes, shoppers are increasingly value-focused, shifting their preference towards cheaper alternatives like private labels. This shift is particularly concerning in key categories where price-sensitive consumers are more likely to choose budget-friendly options over Clorox's branded products, threatening the company's market share. Clorox is also under pressure to continually invest in advertising, promotions, and product innovation to maintain its brand recognition and consumer loyalty. Competing in this environment is costly, especially when facing larger competitors with more financial resources. The company has noted that it expects competition to return to pre-COVID levels, with more aggressive promotional activity as retailers experiment with strategies to boost sales. This will likely force Clorox to match these efforts, putting additional pressure on its margins. Clorox’s dependence on a small number of large customers, particularly Walmart, which accounts for about 25% of its total net sales, presents a significant risk to the company’s financial stability. Nearly half of Clorox’s revenue comes from its top five customers, making a substantial portion of its future earnings reliant on a few key retailers. If any of these large customers, such as Walmart, were to alter their business strategies—such as reducing the number of brands they carry, shifting shelf space to private labels, or demanding lower prices—Clorox’s sales and profitability could be significantly impacted. The trend toward retailer consolidation and the growth of e-commerce further intensify this risk. As retailers grow larger and more powerful, they have greater leverage to demand lower pricing, higher discounts, or other concessions from suppliers like Clorox. If major retailers shift their focus from branded products to private label goods, Clorox could face substantial pressure on its margins and market share. Additionally, Clorox lacks long-term contracts with many of these large customers, adding to the uncertainty. Should unfavorable market conditions or competitive pressures arise, these customers could reduce or cease their purchases of Clorox products, further threatening the company’s financial performance.
There are also numerous reasons to invest in Clorox. One reason is the expectation of higher profit margins in the future. Over the past few years, Clorox's margins were negatively impacted by macroeconomic factors such as inflation and rising commodity costs. However, management has expressed confidence in rebuilding these margins, driven by operational efficiencies and strategic initiatives. Clorox has already delivered seven consecutive quarters of margin expansion and expects to fully restore its gross margins to pre-pandemic levels by fiscal year 2025. Specifically, the company forecasts an increase in gross profit margins from 39% in fiscal 2024 to 42%, with further growth to 44% in fiscal 2025. This margin recovery is largely attributed to cost-saving measures, particularly in the supply chain, as well as a favorable business unit mix, with the more profitable health and wellness segment outperforming expectations. Management also aims to achieve long-term EBIT margin expansion of 25 to 50 basis points annually, reinforcing their strategy to drive sustained profitability. In addition to cost-saving initiatives, Clorox is leveraging its digital transformation efforts to improve operational efficiency and decision-making, enhancing its ability to adapt to market changes quickly. These improvements provide investors with confidence that the company can maintain consistent margin expansion beyond fiscal year 2025. As Clorox rebuilds profitability, this creates a stronger foundation for long-term growth and shareholder value. Another reason is acquisitions and divestitures. Acquisitions and divestitures play a key role in Clorox's strategy to deliver more consistent, profitable growth and make the company a stronger investment opportunity. Management has been actively reshaping its portfolio by selling off businesses that are either volatile or not aligned with long-term profitability goals. Recent examples include the sale of Clorox’s Argentina business and the upcoming sale of its Vitamins, Minerals, and Supplements (VMS) segment. These divestitures are expected to improve gross margins by 50 to 75 basis points and reduce volatility, allowing Clorox to focus on more profitable areas of its business. By shedding these underperforming segments, Clorox can better allocate resources toward areas with higher growth potential, ensuring a more stable and consistent sales trajectory. On the acquisitions side, Clorox has demonstrated success with strategic purchases like Burt's Bees, which has been a strong growth driver within the natural personal care category. Burt's Bees has benefitted from favorable consumer trends toward natural products, and Clorox has leveraged its marketing and innovation capabilities to expand the brand’s reach and deliver long-term growth. The company is focused on acquisitions that align with its capabilities and provide opportunities to scale in midsized categories, ensuring that each acquisition adds value to the business. Another reason to consider investing in Clorox is the favorable consumer trends that are supporting growth across several of its product lines. One example is the increase in cat adoptions during the pandemic, which continues to benefit Clorox's cat litter business. As more households own cats, the demand for litter products remains strong, providing a natural tailwind for growth. This trend is particularly significant as Clorox recovers from supply chain disruptions and works to regain market share in the competitive litter category, where subscription services and e-commerce also play an important role. Additionally, there is a growing consumer focus on cleanliness and disinfecting, a trend that gained momentum during the pandemic and continues to persist. Clorox has benefited from this heightened awareness, with consumers still prioritizing the cleanliness of their homes and workplaces. This ongoing demand for disinfecting products creates a stable market for Clorox’s cleaning and sanitizing offerings, ensuring consistent revenue from this segment. In other categories, such as Glad trash bags, Clorox has successfully addressed past supply chain issues and regained market share, further positioning itself for growth.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
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 2,25, which is the numbers from 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 $23,70. 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 $11,85 (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 695 and capital expenditures were 212. I attempted to analyze their annual report 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 148 in our calculations. The tax provision was 106. We have 124 outstanding shares. Hence, the calculation will be as follows: (695 – 148 + 106) / 124 x 10 = $52,66 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 $3,89 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is $46,76.
I find Clorox to be an intriguing company, and I have confidence in its management, despite the low employee rating. Clorox has historically delivered a high ROIC, but ROIC has been underwhelming in the past three years. Free cash flow reached a ten-year low in fiscal year 2024, and while management believes that we will see improvements, it is still worth monitoring, as is the high debt. Macroeconomic risks, including inflation, rising interest rates, and geopolitical instability, are pressuring Clorox's margins and slowing growth as consumers become more price-sensitive and competition intensifies. These challenges, coupled with supply chain disruptions and currency fluctuations, create uncertainty for the company’s ability to maintain profitability and growth. Competition is a risk for Clorox as it faces pressure from both multinational brands and cheaper private-label alternatives, particularly as inflation makes consumers more price-sensitive. To maintain market share, Clorox must invest heavily in advertising and promotions, which could squeeze margins. Clorox's reliance on a small number of large customers, particularly Walmart, poses a risk to its financial stability, as any changes in these customers' strategies—such as shifting to private label products or demanding lower prices—could significantly impact its sales and profitability. However, Clorox's future profit margins are expected to improve significantly. This consistent margin recovery, along with management's goal of long-term EBIT margin expansion, positions Clorox for sustained profitability and long-term growth. Clorox’s strategic acquisitions and divestitures are driving more consistent, profitable growth by shedding underperforming businesses and focusing on high-potential areas. This approach is allowing the company to concentrate on long-term growth opportunities. Favorable consumer trends, such as the increase in cat adoptions and a heightened focus on cleanliness, are driving growth for Clorox's product lines, particularly in cat litter and disinfecting products. These trends provide a strong foundation for future expansion for Clorox. Nonetheless, the lower ROIC and free cash flow combined with the high debt means that I'm not interested in investing in Clorox at this time.
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