You Won't Clean Up With Clorox

 | Jul 12, 2013 | 1:00 AM EDT
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Some stocks represent bad businesses that you just don't want to own. Clorox (CLX) is a fine company in a solid industry. The shares are just too pricey to deliver decent returns.

In 2005, Clorox management decided to leverage up the company's balance sheet in order to buy back shares. Book value went negative. Corporate level net profits have stagnated, but the lack of growth was masked by the lower share count.

Value Line notes that Clorox earned about $5.46 billion in fiscal 2004 and $5.43 billion in fiscal 2012. Earnings per share went from $2.55 to $4.10 over those eight years. The balance sheet is still weak. At year-end 2012, long-term debt equaled 94% of capital.

Cash flow is being used for dividends and buybacks rather than debt reduction. That leaves Clorox vulnerable to a credit freeze or an interest rate spike. Despite the company's high yield and product lines, it is not a low-risk proposition.

If you are going to take risk, you should be getting well paid. Thursday's close of $85.34 leaves Clorox at about 20x trailing earnings. The stock was slightly more richly valued than that at its peaks in 2005 and 2007. Neither traders nor buy-and-hold types got a good chance to sell for decent profits until 2013. 

The three best buying opportunities came at multiples of 12.7x to 15.8x. All those came along with slightly higher yields than today's as well. A forward price-to-earnings ratio of 18 on this moderate growth company, with its dicey balance sheet, leads to a 12-month target of $83 to $84 on the consensus estimate of $4.63 for the fiscal year ending June 30, 2014.

This year's already completed price surge has stolen away the likelihood of any further gains. Clorox could be the same price or lower a year from now. I am not alone in that view.

CLX, S&P Fair Value

Standard & Poor's assigns Clorox its lowest possible rating in terms of fair value relative to its entire research universe. S&P carries a one-year target just below the present quote. S&P also noted that Clorox was available for purchase at multiples of 12x to 17x during each of the six years 2007 to 2012. Why pay top dollar when you can count on a better price for being patient?

Buyers at the present valuation will probably make a bond-like yield while seeing flattish performance. At worst, these shares could sink $10 to $20, simply retreating to their year-end 2012 price point.

Unless you are speaking about the company's products, you won't be cleaning up with Clorox.

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