Is Clorox Still a Safe Investment?

With shares of The Clorox Company (NYSE:CLX) trading at around $88.51, is CLX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stocks Movement

Clorox has a long list of positives. Well get to that list in a moment. However, should investors use caution when getting excited about the Clorox situation? Is there one major negative that offsets everything Clorox has going for it? Is there a safer investment in the current environment? For now, lets remain optimistic and take a look at that long list of positives for Clorox:

  • Efficient cost savings
  • Successful price increases
  • Decline in commodities costs likely
  • Top-tier brand
  • Strong margins
  • Held up better than peers in 2008/2009 (by wide margins)
  • Strong revenue generator
  • Usually beats expectations
  • Strong guidance (FY2013 EPS of $4.25 to $4.35)
  • Diversified brand portfolio
  • Innovative company
  • 2.90 percent dividend yield
  • Expects to gain market share
  • Expects operating margin to expand

What in the world could possibly offset that list? Potentially nothing, but there is one area of concern. However, well go the suspense route here. Well get to the area of concern on the next page. For now, lets take a look at some comparative numbers. The chart below compares fundamentals for Clorox, Colgate-Palmolive (NYSE:CL), and Procter & Gamble (NYSE:PG). Clorox has a market cap of $11.59 billion, Colgate-Palmolive has a market cap of $55.17 billion, and Procter & Gamble has a market cap of $216.24 billion.

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CLX

CL

PG

Trailing P/E

20.74

22.90

17.97

Forward P/E

18.83

18.64

18.16

Profit Margin

10.03%

14.47%

15.50%

ROE

N/A

106.71%

17.51%

Operating Cash Flow

$769.00 Million

$3.20 Billion

$14.41 Billion

Dividend Yield

2.90%

2.30%

2.80%

Short Position

3.60%

1.00%

0.80%

 

Lets take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Clorox is much weaker than the industry average of 0.50. This is the major cause for concern. If market conditions weaken, then Clorox is going to have a difficult time in this area. All those stock buybacks and that generous dividend yield might have been nice gestures for investors in recent years, but they might not have been the most responsible choices. Procter & Gamble is the most impressive out of this group in this area.

Debt-To-Equity

Cash

Long-Term Debt

CLX

47.75

$445.00 Million

$2.67 Billion

CL

2.19

$1.00 Billion

$5.23 Billion

PG

0.50

$6.97 Billion

$33.43 Billion

 

T = Technicals Are Strong

Though not by much, Clorox has outperformed its peers for every time frame listed below.

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1 Month

Year-To-Date

1 Year

3 Year

CLX

5.69%

21.86%

30.67%

51.73%

CL

5.16%

13.39%

23.55%

51.00%

PG

3.58%

17.41%

22.41%

38.53%

 

At $88.51, Clorox is trading above all its averages.

50-Day SMA

84.58

100-Day SMA

80.12

200-Day SMA

76.37

 

E = Earnings Have Been Steady

Revenue and earnings havent been phenomenal, but theyre not expected to be. Slow and steady is the name of the game here.

2008

2009

2010

2011

2012

Revenue ($)in billions

5.27

5.16

5.23

5.23

5.47

Diluted EPS ($)

3.23

3.79

4.24

4.02

4.09

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue ($)in billions

1.22

1.40

1.54

1.34

1.33

Diluted EPS ($)

0.79

1.01

1.31

1.01

0.93

 

Now lets take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

If the market continues its fall, then investors will either rush into cash, the VIX, or consumer staples stocks. The VIX is only an option for high-risk investors. The majority of seasoned investors will not go that route. Therefore, its down to cash or consumer staples stocks. However, are the aforementioned names in this article still the best options? Consumers have needs, but as consumers weaken, some of them will look for the cheapest options available.

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Conclusion

The laundry will be done, bathrooms will be cleaned, and wipes will be required for certain situations. However, debt is a concern. It might sound crazy now, but dont be shocked if Cloroxs dividend is cut and/or buybacks are halted over the next few years. The irony is that this would be a good thing, not a bad thing. Debt management must be a priority for sustainable success.

Despite debt management concerns, Clorox will likely find a way to solve its problems and weather any economic storms well. It will likely OUTPERFORM the majority of the market if there are difficult times ahead. This doesnt mean the stock will perform well. It means the stock is likely to outperform the S&P 500.

Investors looking for a similar situation without debt management concerns should consider Procter & Gamble. And those investors who would like to profit off consumers going for cheaper products should consider Wal-Mart Stores Inc. (NYSE:WMT) and Family Dollar Stores Inc. (NYSE:FDO). These two stocks actually performed well in 2008.

Using a solid investing framework such as this can help improve your stock-picking skills. Dont waste another minute click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.