Clorox Company (CLX) has operated in the household product industry for over a century and today its portfolio includes brands like Clorox, Glad, Hidden Valley and Kingsford. With 20% of consolidated sales deriving from international markets (two-thirds of these in the fast-growing emerging nations), the company distributes its products through mass merchants, grocery stores and other retail outlets. So, let’s see what strategy might have convinced investment guru Ray Dalio (Trades, Portfolio) to buy almost 14,000 company shares and John Hussman (Trades, Portfolio) to add another 40% to his stock portfolio.
Portfolio Expansion and Brand Strength
Competing in the household and personal-care market, Clorox has faced significant competitive pressures from rivals like The Procter & Gamble Company (PG), but has managed to stand its ground. With 90% of its product portfolio holding the No. 1 or 2 spot in retail aisles, this firm’s brand equity speaks for itself. In fact, since 2005, the company has executed 66 price increases on its products, and 64 of those remain present. New product launches have also ranked in the higher price category, yet volume sales have not suffered until now. Furthermore, this firm has become a valuable partner for retailers like Wal-Mart Stores Inc. (WMT), due to the traffic attracted by its diverse brands.
With a business strategy focused on entering niche categories in the personal care industry, Clorox acquired Burt’s Bees in 2007 and subsequently launched the Green Works lines. With these natural and organic products gaining popularity, Clorox’s lean cost structure, its scale and distribution network, have earned the company consistent operating margins of 17.30%. Compared to P&G’s approximate 19% margins recorded at the end of fiscal 2013, this firm is doing a successful job at competing with its significantly larger rival. Although revenue growth declined post the 2009 crisis, Clorox was able to re-boost figures by 4.60% this year, closing at $5.6 billion in 2013. And for 2014, top-line growth is expected to reach 3.3%, while sales growth will top the 4% mark in the long term.
Valuation and Returns on Capital
Clorox’s efforts to gain independence from product lines like food containers, which consumers are likely to buy on price, have been paying off. Not only has the firm been able to create a differential market value for itself, but Clorox’s returns on invested capital (ROC of 80%) exceed by far its 7.7% cost of capital estimate. With the current P/E of 20.4x its trailing earnings the firm is trading at a premium, compared to the industry average of 19.7x. It is also evidence of the company’s growth, since in the fourth quarter of 2010 the P/E barely reached 14.
Although the volatile markets of Venezuela and Argentina have recently caused some strain to the $1.2 billion international sales, Clorox’s brand strength and solid EBITDA growth of 3.1%, above the industry average of 2.6%, should be sufficient to maneuver temporary headwinds. Also, the strong dividend yield of 3.14% and impressive return on equity of 391.8% leave me feeling very bullish about this company’s future. With a portion of savings reinvested in advertisement and product innovation, investors may do well to keep their eyes on this household- and personal-care firm, as long-term profits are bound to be attained.
Disclosure: Vanina Egea holds no position in any stocks mentioned.