March 11, 2015 The Clorox Company Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 11/11/2012 Current Price (03/10/15) $107.83 Target Price $113.00 SUMMARY DATA (CLX-NYSE) SUMMARY Clorox continued with its upbeat performance in second-quarter fiscal 2015 as both top and bottom lines improved year over year and also beat the Zacks Consensus Estimate. Encouraged by sales growth so far in the fiscal, benefits from product innovation and price increases, the company raised its sales and earnings forecast for fiscal 2015. This, in turn, pushed estimates upward. We also remain constructive on the stock, given its sustained focus on brand-building, technological advancements, global expansion, disciplined capital allocation and cost-saving initiatives, which bode well. However, the company remains susceptible to unfavorable foreign exchange rates which are expected to linger throughout fiscal 2015. Also, the slowing global economy, along with high manufacturing and logistics costs, may weigh on Clorox s results. 52-Week High $110.84 52-Week Low $86.39 One-Year Return (%) 27.10 Beta 0.42 Average Daily Volume (sh) 730,459 Shares Outstanding (mil) 131 Market Capitalization ($mil) $14,145 Short Interest Ratio (days) 5.81 Institutional Ownership (%) 73 Insider Ownership (%) 3 Annual Cash Dividend $2.96 Dividend Yield (%) 2.75 5-Yr. Historical Growth Rates Sales (%) 1.2 Earnings Per Share (%) 1.9 Dividend (%) 8.6 using TTM EPS 23.2 using 2015 Estimate 23.9 using 2016 Estimate 22.2 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606 Low, Type of Stock Large-Growth Industry Soap&Clng Preps Zacks Industry Rank * 96 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 1,338 A 1,325 A 1,413 A 1,547 A 5,623 A 2014 1,364 A 1,330 A 1,386 A 1,511 A 5,591 A 2015 1,352 A 1,345 A 1,374 E 1,514 E 5,585 E 2016 1,375 E 1,358 E 5,702 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $1.01 A $0.90 A $1.00 A $1.38 A $4.31 A 2014 $1.04 A $0.88 A $1.18 A $1.40 A $4.49 A 2015 $1.10 A $0.97 A $1.09 E $1.36 E $4.52 E 2016 $1.18 E $1.07 E $4.86 E Projected EPS Growth - Next 5 Years % 8 (Note: Qtly. Fig. may not add up to annual fig. due to rounding off.)
OVERVIEW Headquartered in Oakland, CA, The Clorox Company is engaged in the production, marketing and sale of consumer products in the U.S. and international markets. The company sells its products primarily through mass merchandisers, grocery stores and other retail outlets. Clorox markets some of the most trusted and recognized brands, including its namesake bleach and cleaning products, Green Works natural cleaners and laundry products, Poett and Mistolin cleaning products, Armor All and STP auto-care products, Fresh Step and Scoop Away cat litter, Kingsford charcoal, Hidden Valley and K C Masterpiece dressings and sauces, Brita water-filtration systems, Glad bags, wraps and containers, and Burt s Bees natural personal care products. The company manufactures products in over 24 countries and markets them in more than 100 countries. The company operates through strategic business units, which are aggregated into 4 reportable segments: Cleaning, Lifestyle, Household and International. Cleaning consists of laundry, home-care, professional products and auto-care products, marketed and sold domestically. Household consists of charcoal, cat litter and plastic bags, wraps and containers, marketed and sold in the United States. Lifestyle consists of food products and water-filtration systems and filters, marketed and sold in the United States, along with all natural personal care products. International consists of products sold outside the United States. REASONS TO BUY Brand Management Provides Significant Opportunity for Long-Term Growth: Clorox's diversified brand portfolio positions the company well above its peers to generate above-average industry growth and sustain itself in the currently challenging environment. The company s approach to brand management allows each of its brands to develop further, through rigorous research and development (R&D), marketing strategies, financial control and operating leverage. Given the strength of many of its brands coupled with opportunities in distribution, we believe that the company is set for significant long-term growth. Clorox remains keen on smooth execution of its 2020 strategy, which is aimed at boosting growth through investment in brands to improve categories and overall market share. Raised FY15 Outlook Pushes Estimates Upward: Clorox delivered robust second-quarter fiscal 2015 results, wherein both top and bottom lines improved year over year and beat the Zacks Consensus Estimate. The company s strong performance in the first half of fiscal 2015, benefits from product innovation and improved pricing, encouraged management to raise its sales and earnings outlook for fiscal 2015. This upbeat guidance triggered an uptrend in the Zacks Consensus Estimate, evident from the upward revisions for fiscal 2015 and fiscal 2016. Tapping Mid-Size Markets Will Provide Ample Growth Opportunities: Clorox has a unique strategy of expanding its global footprint. Where other competitors are investing in the rapidly emerging markets of Brazil, Russia, India and China, Clorox has decided to tap the opportunities available in the Middle East and other booming Asian economies. We believe that with less competition and penetration, along with healthy population size and rising incomes, these countries offer huge growth potential. Equity Research CLX Page 2
Disciplined Capital Strategy: Clorox has always maintained a disciplined capital allocation strategy, focused on making investments to develop its business while using the excess cash to lower debts and enhance shareholder returns through dividend payouts and share buybacks. The company s robust free cash flow generation capability has helped it to bring its debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio to 2.3x at the end of the second quarter of fiscal 2015. Further, the company s cash generation ability is reflected in its tradition of regularly returning excess cash to shareholders in the form of share buybacks and dividend payouts. REASONS TO SELL Foreign Currency Headwinds Remain Matter of Concern: Though Clorox delivered solid results for the second quarter of fiscal 2015, the company was adversely affected by foreign currency translations, especially in Argentina. Going forward, Clorox expects these headwinds to pressure its performance throughout fiscal 2015 and fiscal 2016. Sluggish Global Economy & Soft Product Category: We remain somewhat cautious of Clorox s performance, given the slowing global economy in several regions and high manufacturing and logistics costs. Also, the company anticipates high promotional spending throughout the fiscal. Moreover, Professional Products is expected to witness softness in the third quarter, given the reduction in shipments associated with Ebola and Enterovirus concerns. All these factors are likely to weigh on Clorox s financial results. Competitive Pressure: Clorox faces intense competition from other well-established players in the consumer products industry, such as Church & Dwight, Colgate, and Proctor & Gamble on the basis of pricing, promotional activities and new product introductions. The failure to offer exclusive highquality products at competitive prices may hamper the company s market share, and in turn, dent its top and bottom-line performances. RECENT NEWS Clorox Announces Dividend - Feb 10, 2015 Clorox declared a quarterly cash dividend of $0.74 per share, payable on May 8, 2015 to stockholders of record as on Apr 22. Clorox Reports Strong Q2 Earnings, Ups FY15 View Feb 4, 2015 The Clorox Company posted strong second-quarter fiscal 2015 results, wherein both top and bottom lines improved year over year and also beat the Zacks Consensus Estimate. The company s earnings of $0.97 per share from continuing operations came ahead of the Zacks Consensus Estimate as well as the year-ago earnings per share of $0.90. The year-over-year rise in earnings was mainly driven by improved sales and volumes, cost savings, price increases and lower selling & administrative expenses, partially offset by unfavorable exchange rates, increased manufacturing and logistics expenses, incremental investments made toward demandbuilding and rise in commodity costs. Net sales rose nearly 3% year over year to $1,345 million from $1,308 million in the year-ago quarter, mainly driven by increased prices and higher volumes, offset by unfavorable currency effects. On a Equity Research CLX Page 3
currency neutral basis, revenues increased 6% in the quarter. Moreover, Clorox s sales surpassed the Zacks Consensus Estimate of $1,304 million. During the quarter, volumes grew 4%, aided by increased shipments in all four segments. Moreover, sales benefited from double-digit revenue growth in the Professional Products, Natural Personal Care and Bags and Wraps businesses. Clorox s gross margin expanded 10 basis points (bps) year over year to 42.5%. The year-over-year improvement was primarily due to synergies from cost savings and price hikes, offset by higher commodity costs, mainly resin, as well as increased manufacturing and logistics expenses. Revenue by Segment Sales in the Cleaning segment grew 3% to $447 million, primarily due to a 3% increase in volume. During the quarter, the segment witnessed double-digit volume growth in Professional Products, while Laundry and Home Care volumes remained flat. Household sales increased 5% to $371 million mainly on the back of a 3% rise in volume and price increases in Bags and Wraps. The company witnessed improved volumes in Bags, Wraps and Cat Litter. Sales at the Lifestyle segment were up 4% year over year to $246 million, driven by 5% volume growth. Volumes in the quarter gained from a double-digit rise in Natural Personal Care and Dressings and Sauces, offset by lower shipments in Water Filtration. Sales also gained from incremental demandbuilding programs for the Natural Personal Care business. In the International business segment, Clorox s sales fell 2% year over year to $281 million as the benefits of a 5% rise in volume and price increases were more than offset by adverse foreign currency translation. Excluding currency effect, sales increased 11% year over year. Volume growth during the quarter resulted from gains in Mexico, Canada, Europe and Argentina. Balance Sheet and Cash Flow Clorox ended the quarter with cash and cash equivalents of $819 million and long-term debt of $1,795 million. During the quarter, the company generated $267 million of net cash from operations as against $222 million in the first half of fiscal 2014. The increase can be mainly attributed to lower incentive compensation payments and tax payments in the second quarter, partially offset by $25 million in payments to settle interest-rate hedges associated with the company's issuance of long-term debt. Guidance Despite the projections of strong impact from unfavorable exchange rates and other headwinds in the second half of fiscal 2015, Clorox remains keen on smoothly executing its 2020 strategy, aimed at boosting profitable growth through investment in its brands to improve categories and overall market share. Based on the sales results for the first half of fiscal 2015, benefits from product innovation and price increases, the company raised its sales guidance for fiscal 2015, anticipating an increase of about 1%, compared with flat sales projected earlier. However, this guidance now assumes increased impact from unfavorable exchange rates, i.e., in the range of 2% 3%. Equity Research CLX Page 4
However, the company retained its operating margin forecast for fiscal 2015, which is now expected to remain nearly flat. The effective tax rate is anticipated to be 34%. Further, the company raised its fiscal 2015 earnings forecast to $4.40 $4.55 per share compared with $4.35 $4.50 per share expected earlier. VALUATION Currently, Clorox s trailing 12-month earnings multiple is 23.2x compared with 22.6x, the industry average and 18.2x for the S&P 500. Over the last 5 years, Clorox s shares have traded in the range of 14.5x to 23.4x trailing 12-month earnings. The stock is trading at a premium to the industry average, based on forward earnings estimates. Our target price of $113.00, 25.0x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The Clorox Company (CLX) 23.9 22.2 7.3 18.2 23.2 23.4 14.5 Industry Average 22.3 20.6 6.7 14.9 22.6 19.5 12.0 S&P 500 16.5 15.4 10.7 14.6 18.2 18.4 12.0 Colgate-Palmolive Co. (CL) 23.1 21.1 8.4 20.1 23.8 24.2 15.7 Henkel AG & Co. KGaA (HENKY) 17.3 16.0 8.9 8.8 18.0 19.1 10.4 Church & Dwight Co. Inc. (CHD) 25.9 23.6 9.7 22.4 28.1 28.3 16.0 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow The Clorox Company (CLX) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 50.0 222.3 30.8 372.7 6.4 2.7 13.4 Industry Average 13.7 13.7 13.7 79.3 1.4 1.7 10.9 S&P 500 6.2 9.8 3.2 25.4 N/A 2.0 N/A Equity Research CLX Page 5
Earnings Surprise and Estimate Revision History Equity Research CLX Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CLX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1131 companies covered: Outperform - 16.4%, Neutral - 77.3%, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CLX Page 7