Clorox: Cash-Generative Business With Favorable Long-Term Trends

Bogumil Baranowski of Sicart Associates presented his investment thesis on The Clorox Company (US: CLX) at Best Ideas 2022.

Thesis summary:

Clorox, with roots dating back more than a century, is a global manufacturer and marketer of consumer and professional products with a focus on cleaning supplies. With $7 billion in revenue, a $22 billion market cap, $179 stock price, and 2.6% dividend yield (50%-60% payout ratio), it trades at ~22x earnings.

Clorox is a steady margin, high cash flow business with favorable long-term industry trends. The stock is down, cheap, and out-of-favor. With lowered expectations, Bogumil believes CLX is due for positive surprises. Innovation, cost savings, and permanently elevated demand may prove to be the biggest tailwinds. Bogumil believes it offers about a 10% annual return, driven by earnings growth and dividend.

The stock price has dropped from $235 in mid-2020, down 25%; it is close to pre-pandemic levels. The stock has enjoyed a steady performance since the 2008/2009 financial crisis. Most recently, it benefited from a quick rise during the early COVID pandemic days. The stock rose from $130-$160 to $235. Consumers started spending more on cleaning products, sales followed, and investors responded with more enthusiasm.

Since then, sales continued to do well and demand remained elevated, but expectations exceeded reality. If that wasn’t enough, cost pressures impacted the margins. After a rise in buy recommendations leading up to the all-time high stock price, we saw a steady increase in sell recommendations. Investor sentiment turned negative.

The company has $600-$850 million in profit, $600-$800 million in FCF. There is a $2 billion cost savings plan in place. Clorox has $2.8 billion in net debt vs. $1.2 billion in EBITDA. Business mix: 41% health and wellness, 27% household, 17% lifestyle, 15% international.

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About the instructor:

Bogumil Baranowski is a founding partner of Sicart Associates, a New York City based boutique investment firm catering to families and entrepreneurs on both sides of the Atlantic and the Pacific. He has 17 years of investment experience, and holds a Master’s degree in Finance and Strategy from Institut d’Etudes Politiques de Paris (Sciences Po), and a Master’s in Finance and Banking from Warsaw School of Economics. He is the author of Outsmarting the Crowd – A Value Investor’s Guide to Starting, Building and Keeping a Family Fortune (2015), and Money, Life, Family: My Handbook: My complete collection of principles on investing, finding work & life balance, and preserving family wealth (2019). He is a TEDx Speaker, and a former Executive Board member of one of the oldest and most advanced Toastmasters International clubs in New York City, and an Instructor at MOI Global (The Community of Intelligent Investors).

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