By the two most important criteria that make an investment a candidate for super long-term consideration (diversification and high-quality name brand products), Clorox would seem to be a dream holding. In addition to all the products that actually contain the word Clorox in its name, you also have a bunch of brands under the corporate umbrella like Pine-Sol, Kingsford charcoal, Glad trash bags, K.C. Masterpiece BBQ Sauce, Hidden Valley ranch dressing, those Brita water things, Ajax, Scoop Away, and on and on it goes.
In 2011, Warren Buffett said that the most important consideration when making an investment is pricing power. Specifically, he said, “If you have the power to raise prices without losing business, you have a very good business. But if you must have a prayer session before raising the price 10%, then you have got a terrible business.” As anyone who has ever bought household cleaning products knows, Clorox does not seem to have trouble raising the prices of its goods each year.
That might make you wonder: If Clorox ostensibly shares the same characteristics as the Colgate-Palmolives and Nestles that you frequently hear about, why is it that Clorox tends to go on the backburner compared to other blue-chip stocks that frequently get discussed?
The answer is that Clorox’s management team is well aware that Clorox has high-quality brands that generate stable sales in all economic conditions, and they have leveraged the balance sheet accordingly. Up until recently, Clorox actually had negative equity figures, although management is showing some signs of desiring to bring the debt level down to a more reasonable level. Right now, the figure stands at 93%, as Clorox almost has more debt than total assets.
On the positive side, you are starting to see some restraint; management has reduced the overall debt 30% since 2008, while the company’s annual profits have climbed from $461 million to $580 million. Directionally speaking, profits have been increasing while the debt burden has been decreasing relatively and absolutely, suggesting that Clorox is coming close to getting out of the dog house with some investors that insist upon certain balance sheet requirements before buying a stock. This isn’t like Anheuser-Busch where you have a $49 billion debt load on your hands, $24 billion of which is coming due within five years.
The other concern about Clorox is that the company has had trouble growing sales. In the gawd-awful recession year of 2009, Clorox still managed to sell $5.4 billion worth of stuff. At the end of 2013, we saw that Clorox made $5.6 billion in sales. People want to see more than a percentage increase of 3.7% over five years. And the stagnating sales have affected shareholder’s bottom line: in 2009, Clorox made $3.81 per share on behalf of its owners; in 2013, that figure grew to $4.31. A percentage increase of 13% is what investors consider a good year, not something they want to have to wait five years for—it’s not that Clorox has been especially mediocre, but investors have fairly wondered whether this constant plateau in sales is going to end soon, and that’s why they’ve been reluctant to purchase.
As part of a diversified portfolio, the quality of Clorox makes a lot of sense. But my guess is that a lot of investors would rather have 2x the Colgate-Palmolive allocation rather than, say, putting 3% of their portfolio into Colgate and 3% into Clorox as well. It’s not that Clorox is undesirable, but perhaps the benefits of concentration in Colgate are worth the risks that come with more a portfolio that is more focused in certain areas. Clorox will do fine over the long-term, and will eventually get its mojo back, but the good days for Clorox closely resemble what Colgate-Palmolive investors have gotten in years past, this year, and years future.
Originally posted 2014-06-06 23:34:59.