We maintain our long-term Neutral recommendation on
The Clorox Company
), one of the world's leading manufacturers of consumer products,
based on a balanced risk-reward scenario for the company.
The neutral view on Clorox stems from the company's solid
third-quarter performance in a difficult economy and despite higher
input costs, the benefits of its ongoing cost saving initiatives
and price increases, encouraging forward guidance and intensive
capital investments, offset by intense competition, a highly
leveraged balance sheet and foreign currency effects.
Despite macroeconomic headwinds and higher input cost, Clorox
posted third-quarter 2012 earnings of $1.04 per share that beat
both the Zacks Consensus Estimate and the prior-year period
earnings by a penny. The encouraging results were driven by
benefits from cost saving initiatives and price increases. Driven
by volume growth and contributions from new businesses acquired,
sales increased 7% from the prior period.
Based on robust quarterly performance, management now expects
sales growth of 4% in fiscal 2012, up from 2% to 4% forecasted
earlier. Clorox has also established long-term financial goals to
measure its progress. These goals include 3% to 5% annual sales
growth before acquisitions, and 75 to 100 basis points of annual
improvement in operating margin.
Additionally, the company has plans to carefully manage the
growth of its asset base. Clorox is cautiously managing its asset
value and focusing on realizing double-digit economic profit growth
and free cash flow of 10% of net sales in fiscal 2012.
Further, the company is constantly looking for acquisitions and
alliance opportunities to boost its market share and product
portfolio. Clorox is making intensive capital investments in
information technology systems and capabilities, particularly in
the international market and R&D facilities to boost
productivity while providing platforms for growth, product
innovation and cost savings. The company believes that these
initiatives will begin delivering benefits later in fiscal 2014 and
On the flip side, has a highly leveraged balance sheet with
long-term debt of $1,570 million at the end of first quarter of
fiscal 2012. The high debt level may adversely affect the company's
financial flexibility as well as the ability to pursue acquisitions
or expand operations organically.
The company faces intense competition from well-established
consumer product companies, both in the U.S. and international
markets. Clorox competes head-to-head with
Procter & Gamble Company
Moreover, the company's performance may be affected by its
significant presence in international market (approximately 21% of
revenue), which exposes it to unfavorable foreign currency
translations, economic or political instability and other
governmental actions on trade and repatriation of foreign
Currently, Clorox has a Zacks #4 Rank, implying a short-term
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