Great value
Clorox has a very strong free cash flow (10% to 12% of sales) and return on invested capital percentage (23%, the peer average is roughly 15%).
As a result, Clorox fair estimate must be quite high.
The sell-side has conservative estimates. According to Yahoo Finance, the median price target is $86. Morningstar, on the other hand, is quite bullish, with a $92 fair value estimate.
Competitors aren’t a serious problem
Church & Dwight Co., Inc. (NYSE:CHD) and Zep, Inc. (NYSE:ZEP) represent a strong fast-growing middle-sized and a stagnant small-sized competitor respectively.
Like The Clorox Company (NYSE:CLX), Church & Dwight Co., Inc. (NYSE:CHD) takes brand strength seriously. More than 80% of its revenue comes from 8 so-called power brands: Arm & Hammer, Orajel, Oxiclean, Nair, Spin Brush, Xtra, First Response, and Trojan. The brands address diverse segments and are very strong in the U.S. but, unlike Clorox, their international presence is still quite limited. In fiscal year 2012, only 20% of sales came from abroad. The upside is that Church & Dwight Co., Inc. (NYSE:CHD) has far more room for growth.
Unlike Clorox, the company has strong exposure not only to household products but also to the personal care segment. The upside to this is that its portfolio mix is more diversified. The downside is that with an $8.3 billion market cap, the company may have too few resources to compete optimally in every segment, specially against some major personal care giants like Procter & Gamble.
Church & Dwight Co., Inc. (NYSE:CHD) is currently trading at a 23.2x price-to-earnings ratio, above Clorox.
On the other hand, Zep, Inc. (NYSE:ZEP) is only in the business of providing cleaning and maintenance chemicals to commercial, industrial and consumer customers. This market alone is said to be worth $75 billion globally (according to the company presentation slides). Unfortunately, without accounting for the effect of acquisitions, Zep, Inc. (NYSE:ZEP) is experiencing no organic growth. The company has predicted a mild revenue contraction for the first 3 quarters of 2014. The company is also quite leveraged, with a debt-to-equity ratio of 1.33.
Zep, Inc. (NYSE:ZEP) is trading at a 15.8x price-to-earnings ratio, below Clorox.
Final foolish thoughts
It’s hard to imagine a world without The Clorox Company (NYSE:CLX). The brand is simply too strong to be ignored. Furthermore, excellent fundamentals, a commitment to actively return value to shareholders via dividend increases and share repurchases, 10-12% of sales converted to free cash flow and one of the highest ROICs in the industry make Clorox a strong and safe investment opportunity.
Competitors do exist, but they do not represent a major risk. Most competitors have a wider field of action, operating in various segments. This is a disadvantage, because they can devote less resources to compete against Clorox. Taking these factors under consideration, Clorox may be a great choice for investors willing to reduce volatility in their portfolios.
The article Why This Bleach Manufacturer Offers Great Value originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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