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The Clorox Co (CLX): What To Watch On Investor Day?

 October 03, 2013 09:29 AM

The Clorox Co (NYSE:CLX) is expected to hold its 2013 Investor Day on Oct. 3, 2013, in Oakland, California. The event comes as the company is facing an intensifying competitive environment and market share challenges, which it is beginning to address via higher trade spending.

The Clorox Company makes household cleaners and bleach, charcoal, cat litter, automotive care products, dressings and trash bags. Clorox markets its products in the U.S., Canada and Latin America, with token operations in other international markets. Core brands include Clorox, Brita, Kingsford, Glad, STP, Pine Sol, 409, Fresh Step, Scoop Away, Hidden Valley and KC Masterpiece.

The meeting is expected to be heavily focused on the company's formidable R&D and product innovation effort, with few material changes to long term targets despite a difficult near-term consumption environment. This situation is challenging the company's ability to deliver on its 3-5 percent organic growth target in the near term, likely leading to full-year guidance at the low end or below previous range.

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Clorox announced that it would introduce a new "2020 Strategy" at the analyst meeting, the successor to its Centennial Strategy introduced in 2007 that called for 3-5 percent organic sales growth, annual operating margin expansion of 50-70bps, and 10 percent annual economic profit growth.

"The results of the strategy have been mixed, with the US recession and continuing tepid consumption environment weighing on sales and margins over this time period. The company hit its organic growth target in three of the six years of the plan and fell just shy in FY13, with average organic growth of 3.1% during this time period," Deutsche Bank analyst Bill Schmitz said in a client note.

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Going forward, many investors question the viability of the company's 3-5 percent long-term organic growth target, noting US-centric business with tepid recent consumption trends and share losses in a highly competitive environment, with promotional activity (which admittedly waxes and wanes) decidedly elevated of late.

The market may want to hear how the company is dealing with this situation and its strategy to achieve sales growth in the tough environment.

Meanwhile, Venezuela and Argentina, typically outsized growth markets for Clorox that represent roughly a combined one-third of its international business, are currently experiencing rampant inflation and government price controls, severely limiting the company's ability to take pricing in these markets and dramatically impacting profitability.

"Putting it all together, we expect that if management intends to keep its 3-5% organic growth target in place (which we view as highly likely) it will have to lean even more heavily than in the past on innovation, which should be the primary focus of the analyst meeting, especially given the highly-anticipated R&D center tour," Schmitz said.

On the positive side, the company has consistently executed on its annual target for incremental sales growth from innovation, even after upping the target to 3 percent from 2 percent in fiscal 2012. Upside could also come from the company's professional business, which continues to grow at a healthy double digit clip and is an area in which the company continues to pursue bolt-on acquisitions.

CLX stock has modestly outperformed the S&P500 since the start of the Centennial Strategy in fiscal 2008, advancing 32 percent since that time versus a 12.5 percent gain for the S&P. The company said its Centennial Strategy delivered total stockholder returns of 88 percent, compared to an average of 82 percent for its peer group and 40 percent for the S&P 500 over the company's past five fiscal years.

Most of the outperformance occurred during 2008 as investors flocked to US-centric staples names as safe-havens, with relative performance roughly in line with the market since then and notably boosted by the yield-starvation trade and activist investor involvement.

For the fourth quarter, it reported increases in sales and profits, and a 36 percent increase in free cash flow year-over-year. The company has been using its free cash flow to initiate buybacks as it repurchased 1.5 million shares in the fourth quarter, and to raise its dividend, as it has every year since 1977. The company currently pays out $2.84 annually, resulting in a yield of about 3.45 percent.

Currently, CLX shares trade 16.7 times its forward earnings. The stock currently trades at 8.8 percent below its 52-week high, so there is plenty of room for price appreciation as well as the income from dividend payments.



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