Risk

Past and future gains contained in this report are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent

I could waste a lot of your time with graphs, charts, and other assorted worthless information all intended to show you that I know something about something when it comes to this company, but the truth is, I know very little about this company. My intent with this report is to provide you with an overview of my various company valuations, all based on the company’s most recent 10-K filing, so you can determine if you have any investment interest.

What They Do

The Clorox Company is a manufacturer and marketer of consumer and professional products such as Clorox® bleach, Pine-Sol® cleaners, Liquid-Plumr® clog remover, Poett® home care products, Fresh Step® cat litter, Glad® bags, wraps and containers, Kingsford® charcoal, Hidden Valley® dressings, Brita® water-filtration products, Burt’s Bees® personal care products, RenewLife® digestive products, and Rainbow Light®, Natural Vitality™ and NeoCell® dietary supplements. The Company also markets professional use products CloroxPro™ and Clorox Healthcare®. Competitors include Colgate-Palmolive Company, The Procter and Gamble Company, and S. C. Johnson and Son, Inc.

Short-Term Target

My current short-term target for the stock is $163.58, with an initial trailing stop set at $143.55. Based on a recent price of $145.74, upward price movement will find resistance at $146.88 and again at $148.38, with final resistance found at $151.3.6. Downward price movement will find no support.

Momentum Target

My momentum target for the stock is $134. Momentum targets are determined by integrating a company’s most recent annual EPS and year-over-year earnings growth, with the current yield of a 10-year treasury. Momentum investing often requires investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.

Growth Target

My current growth target for the stock is $147. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Volatility

There are many different metrics available to help investors determine the theoretical volatility of a stock as compared to the volatility of the entire market. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 0.47.

Mergers/Acquisitions

On April 2, 2018 (FYE 2018), the company acquired Nutranext, a dietary supplements company based in Sunrise, Florida. The purchase price was $681 million. There were no company mergers or business acquisitions during fiscal 2019.

Divestitures/Dispositions

There were no company divestitures or business dispositions during fiscal 2019.

Subsequent Events

Subsequent Events are material events that happen after the close of a company’s fiscal year but before the company has filed its most recent annual 10-K reports.  For The Clorox Company, there were no subsequent event filings.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. Considering the company’s earnings, 0% of net income came from tax benefits, while 0% of net income came from sources unrelated to day to day operations.

The Tax Act

In December 2017, The Tax Cuts and Jobs Act (the Tax Act) was passed into law, which significantly reduced the cost of U.S. repatriation. During the second quarter of fiscal year 2018, the company made reasonable estimates of the impacts of the Tax Act and initially recorded total benefits of $81 million as provisional. In the third quarter of fiscal year 2018, the company concluded an analysis wherein it determined that none of the undistributed earnings of its foreign subsidiaries were indefinitely reinvested. As a result, the company is providing foreign withholding taxes on the undistributed earnings of all foreign subsidiaries where applicable.

Unrelated Income

Income unrelated to a company’s day to day operation, such as income tax benefits or income from other sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. For The Clorox Company, none of the company’s operating income came from income tax benefits or from other sources.

Insider Transactions

The SEC classifies insiders as the “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

In the past 12 months, the company has reported 109 insider trades involving 760,079 shares of stock. Of those 109 insider trades, 56 were Buys involving 405,150 shares of stock, and 53 were Sells involving 354,929 shares of stock, creating an insider buy to sell ratio of 1.1 to 1.

Five Year Growth of $10K

Had you invested $10K in this stock five years ago (06/30/14), you would have received 109 shares of stock with a cost basis of $91.40 per share. Had you held the stock for five years and then closed your position (06/30/2019), you would have closed at $153.11 per share. During that holding period, you would have collected $364 in regular and special dividends, and your initial $10K investment would have returned to you $16,752 a gain of 68% excluding regular and special dividends.

Year-Over-Year Metrics

Several year over year metrics that are of interest to many investors are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For The Clorox Company, revenue increased by 1%, earnings increased by 2%, free cash flow increased by 4%, debt increased by 8%, and the stock price increased by 12%. Year to date the stock price is down 5%.

Other Value Considerations

Other value considerations include the PE Ratio, the PEG Ratio, Return on Assets, Return on Equity, Return on Capital Employed, Return on Invested Capital, Cash Flow From Invested Capital, and Tangible Book Value. For The Clorox Company, the current PE Ratio is 22, the PEG Ratio is 2.2, Return on Assets is 16%, Return on Equity is 147%, Return on Capital Employed is 25%, Cash Flow From Invested Capital is 56%, and Tangible Book Value is $(15).

Enterprise and Equity Values

As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For The Clorox Company, my enterprise value (market cap plus debt less cash) is $166 and my equity value (market cap plus cash less debt) is $125, making my E2E Ratio, 0.75.

Fair Value

Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $93. My worksheet Initiate, Reduce (Sell Half), and Terminate target prices are derivatives of my fair value estimate.

My Investment Consideration

The Clorox Company (NYSE: CLX) – FYE 06/2019 SELL HALF – The stock is currently trading at levels at or above my most recent $117 reduce target, but below my most recent $150 terminate target. Please See Linked Worksheet

There you are, thoughts from a rickety pier.

Wax
Revised on 11/19/19