Clorox Is Ready to Clean Up
Jun 19th 2012 6:08PM
Updated Jun 19th 2012 6:12PM
Wall Street enthusiasm can be tepid at best for some companies the Motley Fool CAPS community has bestowed its top honors on. So who has it right? The professional class of analysts sitting in their paneled offices smoking stogies, or a motley community of investors pooling their best thoughts for others to share? We think we know who'll come out ahead. How about you?
Of course, as much as we love our CAPS community, don't buy a company just because its garnered top ratings. And don't sell it just because Wall Street says to, either. Investing requires closer diligence on your part, so use these ratings as a launching pad for your own research.
A confidence game
Consumer confidence in the U.S. fell to a six-month low in the latest survey, hitting 74.1 from 79.3 last month. What's worse is it came in well below the 77.5 economists were expecting, suggesting that people don't expect a "Recovery Summer" this year. Job growth is slowing and unemployment is rising, and though the price of oil has fallen under $85 a barrel, wage gains aren't keeping up with inflation.
Adding to the misery is a decline in industrial output that saw production at factories, mines, and utilities contract 0.1%, compared with a 1% gain the month before. Not surprisingly, industrial product suppliers like Fastenal (NAS: FAST) , Grainger (NYS: GWW) , and MSC Industrial Direct (NYS: MSM) have all seen their shares peel back 10% or more from the highs hit in March and April.
Yet the S&P 500 has jumped 5.2% so far in June, as the probability grew the Federal Reserve will flood the markets with more easy money -- as if that will help cure the malaise.
Wiping the slate clean
Against such a backdrop, it's easy to understand why the analysts tracked by CAPS have a middling view of consumer-products giant Clorox (NYS: CLX) . If consumers are feeling pinched, they'll keep their purse strings pulled close more tightly. The CAPS community is more sanguine, though, as 96% see it beating the broad averages, perhaps noting that it has trounced the averages over several decades.
The analysts at Zacks, for example, were encouraged by Clorox's latest earnings report that showed gains from cost-saving initiatives and apparent acceptance by consumers of price increases it initiated, but they still kept ratings at "neutral" because of economic headwinds that Clorox and other consumer-goods companies faced. Yet Citigroup analysts saw those same factors, and with 2012 sales expected to grow 4%, they upgraded the stock to a "buy" rating.
Investors think doing one thing and doing it well serves Clorox best. CAPS member wowdwarf2 says it's a simple company to understand and noted last month that it is "still able to keep even while the market is in retreat." The S&P had fallen 7% in March.
A clean sweep
Shares of Clorox have done quite well for themselves (and investors), rising almost 7% over the past month, though that's made the stock not as cheap to buy as it once was. Even though the stock goes for about 17 times earnings estimates, compared with its growth prospects it seems a bit pricey, and with an enterprise value-to-free cash flow ratio of 27, it's a tad expensive that way, too. At least on the surface, Zacks would seem to have it right with its neutral rating.
But that would be a nearsighted view. Over the next five years Clorox aims to triple the size of its health-care business to $300 million, at least half of which would occur through acquisitions. The health-care line of products has soared from $2 million in annual revenues to $100 million today in just the past five years, and with so many small companies out there focusing on disinfectants and cleaners, it sees plenty of opportunity to add to the two acquisitions it made earlier this year.
Clorox is also looking to expanding internationally and has its eye on Procter & Gamble's (NYS: PG) bleach business in Central America. The core business will always be about bleach, but Clorox wants to take advantage of increased consumer concern about cleanliness.
Analysts are looking for Clorox to post revenues of $1.53 billion in the current quarter, which still makes the health-care business a small one in the overall scheme of things, but it's one of the fastest-growing ones it has. Profits are also expected to rise to $1.27 a share, meager growth from the year-ago period, but part of a steady progression that will see earnings rise by more than 5% in 2013.
It's that almost single-minded purpose that attracted me to rate Clorox to outperform on CAPS and causes me to maintain the rating despite the dour confidence consumers are currently exhibiting. Add Clorox to the Fool's personalized stock-tracking service and tell me on the Clorox CAPS page or in the comments box below whether you think it will continue to clean up.
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At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Citigroup and Clorox. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and MSC Industrial Direct. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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