The search for undervalued companies has yielded many results after the recent downturn in the market. However, none stick out more than The Clorox Company . This international titan has fallen over 6.5% from its 52-week high, and is poised for a large run from its current level.
Clorox is a worldwide leader in the manufacturing and marketing of consumer products. It is home to some of the most popular brands that many consumers use every single day. In fact, 90% of Clorox's brands hold the number one or number two ranking in its market:
Clorox Disinfecting Wipes
Clorox Toilet Bowl Cleaner
Tilex / Clorox Bath Cleaner
Kingsford / Match Light
Brita Water Filtration
Clorox Clean-Up Spray
Clorox 2 for Colors
Fresh Step / Scoop Away
Glad Disposal & Food Storage
Hidden Valley Salad Dressing
Fourth quarter results
On Aug. 1, Clorox released its fourth quarter report for fiscal 2013. The results were mixed, but positive overall.
Earnings per share of $1.38 vs. expectations of $1.34
Revenues of $1.5 billion vs. expectations of $1.6 billion
Earnings per share increased 5% and revenue rose 0.4% year-over-year. Gross margin for the quarter expanded 130 basis points to 44%, thanks to cost savings and price increases. Even with the increased revenue, volume in several segments saw a decline from the same period in 2012. However, the strength of Clorox's brands will help boost volume back to normal levels, and this could push sales to record highs.
Fiscal 2013 results
Earnings Per Share
80 basis points
Financial results for fiscal 2013 were in-line with analyst expectations. The most notable statistic in the report is the increase in gross margin. By making more profit on its products, Clorox's volume could remain flat and still see its revenue rise. Gross margin could easily surpass the 43.5% mark for fiscal 2014.
In the fourth quarter report, Clorox confirmed its outlook for fiscal 2014. The expectations currently call for:
2%-4% sales growth
Earnings per share of $4.55 to $4.70
Increased cost savings
Lower selling and administrative costs
This outlook is in line with the consensus analyst expectations of $4.62 earnings per share on $5.8 billion in revenue. Also, it is safe to assume that 2014 will be the 38th consecutive year with a dividend raise. Increased sales, increased cost savings, and reduced expenses create a recipe for great success.
Free cash flow
Clorox reported $583 million in free cash flow for 2013, a 36% increase from 2012. This free cash flow is often used to increase distributions to shareholders, as it has raised its dividend every year since 1977. There is no reason for this streak to end anytime soon.
Free cash flow has also been used by management to initiate share repurchases. Share repurchases reduce the amount of shares outstanding, which boosts earnings per share and makes the remaining shares more valuable. In the fourth quarter, Clorox repurchased about 1.5 million shares for approximately $128 million. Management says its number one priority is creating stockholder value, and their actions confirm this to be the truth.
The household products industry provides plenty of competition for Clorox. Proctor & Gamble and Kimberly-Clark are two of the largest companies in the world. Proctor & Gamble is most known for its brands such as Tide, Duracell, Vicks, Mr. Clean, Pampers, and Febreze. Kimberly-Clark's brand portfolio includes Kleenex, Cottonelle, Huggies, Scott, and Kotex. All of these include products we currently use or have used in the past, much like Clorox's line.
Proctor & Gamble
(Source: Yahoo! Finance)
All three of the companies in focus have incredible brand strength and market share. In the analysis, Clorox is shown to be trading at the cheapest valuation today, but all have favorable growth going forward and have performed well year-to-date. Through innovation, they each have the ability to continue to grow for decades and would make for good investments. However, Clorox's low market cap gives it a much higher potential to double or become the next big takeover target. For years, Clorox has been said to be the perfect fit for Warren Buffett's Berkshire Hathaway portfolio, and I could not agree more. Buying a stock based on the possibility for a takeover is not always a smart move, but when it comes to a fundamentally strong company that will do well regardless, it is very smart.
The bottom line
Clorox is one of the most undervalued companies in the market today. It is expected grow consistently over the next several years, and its healthy 3.4% dividend will provide additional returns. Keep an eye on this one and take a look to see if it would fit your investment strategy.
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The article An Undervalued Industry Giant originally appeared on Fool.com.
Joseph Solitro has a long position in Clorox. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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