A little less than a year ago, YCharts suggested that Clorox (NYS: CLX) looked like a bargain. And -- surely no thanks to us -- Carl Icahn seemed to agree, disclosing a 9.1% stake in the consumer products maker by February, and then by July, launching a not-entirely-convincing takeover offer for the company valued at around $10 billion, not much above Clorox's market cap.
Icahn's bid doesn't offer a huge premium. If he indeed put Clorox into play, no competing offer has yet surfaced. And it appears that Clorox's management may run the old man off. If it does succeed in ridding itself of Icahn, the stock could fall back and may again look pretty cheap by the standards of recent years, when Clorox often commanded a somewhat gaudy P/E ratio.
But the company needs more than merely to rid itself of Icahn. Volume -- the actual number of bottles of bleach, boxes of Glad bags, bottles of Hidden Valley Ranch salad dressing that Clorox sells -- was flat in the fiscal year ended June 30. The company is projecting 1% to 3% sales growth for fiscal 2012, but to get there is has been jacking up prices aggressively. In a crummy economy.
This month (August 2011) Clorox pushed through the following price increases:
Clorox liquid bleach: 12%
Formula 409: 6%
Glad wraps: 7%
Hidden Valley dressing: 7%
Kingsford Charcoal: 7% to 16%
Wow. If those increases stick, even with slight volume declines, Clorox could make its projected sales increase. But as the economy seems to be entering a sickening lull, the average consumer might just think about buying store-brand bleach, cleaning fluid, plastic wrap, salad dressing, and charcoal. Selling these commodity items at premium prices has long been Clorox's claim to fame with investors. It spends $500 million or so a year advertising the stuff, nearly 10% of sales.
There's another issue with Clorox. It has been so darned shareholder-friendly -- paying a lovely dividend, currently yielding about 3.5%, and buying in shares like crazy -- that it ended fiscal 2011 with negative shareholders equity.
Sure, sure, we've all heard the rap from slow-growth consumer products companies. Our brands are our equity. But at some point, debt can leave a company with little financial flexibility. A little trouble can turn into big trouble. Clorox has a nice collection of brands for which it charges full price. It needs to find a way to sell more stuff, not just charge more for it, and let improved results push its stock up instead of counting on balance-sheet-sapping buybacks.
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