(CLX) Clorox’s Risk-Reward Balances

We are maintaining a long-term Neutral recommendation on Clorox Corporation (CLX) with a target price of $71.00 per share. Moreover, the company has a Zacks #4 Rank, implying a short-term Sell rating on the stock.

Clorox is one of the world’s leading manufacturers of consumer products. Furthermore, the company possesses a strong portfolio of brands, including Clorox, Glad, Brita, Armor All, Burt’s Bees, STP and Kingsford, whichoffer a competitive edge to the company and bolsters its well-established position in the market.

Moreover, Clorox has established financial goals to measure its progress. These goals include 3% to 5% annual sales growth before acquisitions, and 75 to 100 basis points of annual improvement in operating margin.

Additionally, the company has plans to carefully manage the growth of its asset base. If these financial goals are achieved, management believes it can realize double-digit economic profit growth and free cash flow of 10% to 12% of net sales.

Moreover, with the intention of expanding its capabilities in the areas of health and wellness, Clorox acquired the assets of Caltech industries in fiscal 2010, which provides disinfectants for the healthcare industry. With this acquisition, Clorox has become a provider of bleach disinfectants to more than 2,500 acute care facilities across the United States. The acquisition has not only strengthened the company’s product offerings, but also its expertise, R&D and sales capability.

In addition, Clorox is making intensive capital investments in information technology systems and capabilities, particularly in the international market, and is providing R&D facilities to enhance productivity and provide platforms for growth, product innovation and cost savings. The company believes that these initiatives will begin delivering benefits later in fiscal 2014 and beyond.

However, Clorox’s unfavorable product mix, increased input and logistics costs battered the third-quarter 2011 results. The quarterly earnings of $1.03 per share inched down 3.7% from the prior-year quarter.

Further, Clorox has a highly leveraged balance sheet with a long-term debt of $2,125.0 million and a long-term debt-to-capitalization ratio of 104% at the end of the third quarter of fiscal 2011. The high debt level adversely affects the company’s financial flexibility as well as the ability to pursue acquisitions or expand operations organically.

Above all, the company faces intense competition from other well-established consumer product companies, both in the U.S. and in international markets, such as Colgate-Palmolive Co. (CL) and Procter & Gamble Co. (PG). Most of the company’s products compete with other widely-advertised brands within each product category and “private label” brands and “generic” non-branded products of grocery chains and wholesale cooperatives in certain categories, which typically are sold at lower prices.

COLGATE PALMOLI (CL): Free Stock Analysis Report

CLOROX CO (CLX): Free Stock Analysis Report

PROCTER & GAMBL (PG): Free Stock Analysis Report

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