Equity Valuation - Clorox Company - Case Study Example

Task Company overview Clorox Company is a multinational company that not only deals with manufacturing activities but also marketing of both consumer and professional products. It majorly operates in four segments, that is, lifestyle, household, cleaning and international (Sander, Peter and Scott 76). The company is based in Oakland, California and makes use of grocery stores, distributors, medical supply providers, merchandisers and other types of retail outlets to sell its product. The company has various brands including its namesake bleach and cleaning products. The company deals with various products; laundry, water filtration, auto-care products home-care cleaning products and professional products. The home-care cleaning products include wipes, carpet cleaners, drain openers, reusable cleaning cloths, mildew removers, spray glass surface cleaners and toilet bowl cleaners. Auto-care products include tire and wheel-care products, waxes and automotive fuel and oil additives, protectants and washes among others. Laundry products on the other hand, include bleaches and laundry stain removers. Clorox sells all these products under different brand names. Company customers are majorly retailers, wholesalers, grocery stores. The company sells its products majorly within United States. Some products such as healthcare, janitorial, and food service go through distributers. Clorox sells some of its products outside the United States by utilizing licensees and third-party distributors. By making use of distributors and other types of retailors, the company improves its ability to reach more customers. Another important aspect to note about the company is the centennial strategy. Clorox announced its centennial strategy in 2007, which was to guide it through 100-year-old anniversary. The main aim of the strategy is to accelerate sales by developing existing brands into surrounding categories of products through expansion and innovation. Apart from expansion to other products categories. The company’s other aim is to establish new sales channels and develop the business through market development. Clorox ranked number 461 in the recent Fortune’s 2013 500 list with net sales of $5.6 billion. The company has had various achievements in the past; in 2008, it happened to be the first to develop and launch a natural cleaning line into the mainstream cleaning aisle. In 2011, it became the first in the adoption of the corporate trend in the integration of corporate social responsibility (Carroll, Archie, and Buchholtz 125). Estimation of intrinsic value per share Various methods are to estimate the approximate value of a company stock. The analysis is important for decision making concerning investments. One of the methods used is the calculation of intrinsic value. This approach helps an individual to estimate the price of a company stock based on expected future earnings per share as well as dividends. With a favourable company in mind, one will be able to estimate the amount payable per share. When calculating the intrinsic value per share, one has to make some assumptions. Assumptions in calculating intrinsic value of Clorox share include: The investment horizon is 10 years. The companys Earnings per Share is currently $4.09 (as per 2012) The estimation of the growth of EPS is 11.6% for the next 10 years (taking annual growth rate from 2002-2012) The companys average PE ratio has been around 17.1 (taking the current PE) and will continue into the near future. The company has an average dividend pay-out of 60% (the pay-out has been fluctuating but the average is 60%) Forecasted stock price after 10 years = earnings per share after the 10th year x Average PE ratio. EPS after the 10th year = current EPS x rate of increase in EPS EPS after 10th year = 4.09 x 1.11610 =$ 12.26 Forecasted stock price after 10 years = $ 12.26 x average PE ratio Stock price = $ 12.26 x 17.1 = $ 209.65 Determination of total dividends = total EPS x average dividend pay-out Total EPS = $4.09 x 10 =$ 40.9 Total dividends = 40.9 x 60% = $ 24.54 24.54 + 209.65 Future stock price = $ 234.19 PV = FV (1 + r)-n = 234.19 PV = FV/ expected ROI = 234.19/ 1.11610 = $ 78.15 Analysis of free cash flow (detailed with date) Free cash flow is the amount of net income available after the settlement of all debts and obligations. It is the amount attributable to shareholders. A firm with increasing free cash flow implies a positive trend and good business strategies (Falcón 92). The value of the free cash flow is estimated by deducting capital expenditure from the net operating cash flows. Analysis of Clorox Company free cash flows over the past five years shows a non-stable trend. The free cash flows as at June 2009 was $ 537 million. In 2010, there was an improvement in the free cash flows to $ 603 thus indicating good strategies. The free cash flows in the year ended June 2011 dropped to $ 557M and later to $ 541 in 2012. The reduction trend in the free cash flows from 2010 to 2012 indicates possible inefficiency in management thus declining liquidity. There was an improvement in the level of free cash flows from $ 541 to $ 572. RATIO ANALYSIS Period Ending 6/30/2013 6/30/2012 6/30/2011 6/30/2010 Liquidity Ratios Current Ratio 125% 67% 94% 91% Quick Ratio 90% 48% 66% 70% Cash Ratio 26% 13% 19% 5% Net Working Capital Ratio 9% -30$ -3% -5% Profitability Ratio Gross Margin 43% 42% 43% 44% Operating Margin 17% 17% 13% 19% Pre-Tax Margin 15% 14% 11% 15% Profit Margin 10% 10% 11% 12% Pre-Tax ROE 584% 586% 655% 970% Post-Tax ROE 392% 401% 648% 727% Liquidity ratios indicate the ability of the firm to meet its short term maturing financial obligations/current liabilities as and when they fall due. Current ratio therefore indicates the number of times the current liabilities can be paid from current assets before these assets are exhausted. From the figures above, the current ratio for year ended 6/30/2013 is 125%, meaning the company can pay out all its current liabilities using its current assets and there would be a 25% remainder. Quick ratio shows the number of times current liabilities can be paid using current assets less inventories. From the ratios, it can be seen that there is an improvement in quick ratios from the fiscal year 2010 through to 2013. The 2013 fiscal year results mean that 90% of current liabilities can be repaid using when due using current assets less inventories. Profitability ratios on the other hand indicate performance of the company in relation to its ability to derive returns or profits from investment or from sale of goods (Falcón 11). Gross margin ratio indicates the ability of the company to control its cost of sales. From the table above, Gross margin 43% means that 57% of revenue was taken up by cost of sales while 43% was the gross profit. Margins of the four fiscal years provided shows a constant gross margin meaning the company controls its cost of sales between 56% - 58% of sales revenue. Operating margin on the other hand indicates ability of the firm to control its operating expenses. For Clorox Company ratio above, the latest operating margin is 17%, meaning 83% of sales revenue are take up by cost of sales and operating expenses and 17% remains as the net profits. Operating margin for the last two fiscal years are constant meaning the company has a way controlling their costs of sales and other expenses. The ratios also show positive returns on equity which indicates the return of profitability for every dollar contributed by the shareholders. The company therefore offers higher returns judging from the return on equity ratios above. Buffett’s three main tenets of investment are: the company should have an economic moat, should have a definite competitive advantage in its market place; should offer some margin of safety such as discounts at time of purchase and it should be run b y exemplary shareholder management. Clorox Company has it all. Clorox meets the criteria of simple to understand company. The Company, a consumer products company, creates and sells products that are identifiable with the consumers as they make their everyday lives better. Mr. Buffett should therefore invest in this company. With an appetite for highly visible, trusted and valuable brands, Clorox is one Company with strong and highly respected brands such as Clorox bleach, Glad, Burt’s Bees etcetera; this would be Mr. Buffett’s best bet. The company also offers future sustainability with long-term goals and strategies in place to increase stockholders wealth. The company has a 2020 strategy which focuses on evolution to maximize stockholders value (Viebig et al, 136). The achievement of this strategy would make the company focus on highest value opportunities to deliver future sustainable profitable growth and a strong total stakeholder returns over a long-term period. With Buffett’s keenness for sustainability, he sure will get it at Clorox. If the current Company’s performance is anything to go by, then this is definitely the best Company for Buffett to invest in. The company in its latest financial report, Has reported an increased earnings from operations from $543 million in the previous year to $574 million in the current year. Net earnings per share also increased to $ 4.31 from $4.10 in the previous financial year. The Company also realized increments in economic profits from $402 million in the previous fiscal year to $426 million in the current fiscal year. Investing in Clorox Company however comes along with risks just like in any business. The company’s ability to achieve its long-term goals and strategies has a probability of below 1. This therefore means that there is the risk of the company not being able to be sustainable in the long-term as their sustainability would depend on the success of their strategies and goals set (Viebig et al, 36). There is also the risk of a change in management which may impact negatively on the company performance. Despite of all these however, all businesses have an element of risk and uncertainty. These should therefore not be barriers against investing. Clorox Company perfectly fits Mr. Buffett’s explanation of a good business to buy. Right from exemplary shareholder-friendly management to definite competitive advantage, sustainability of the business and existence of margin of safety at the time of purchase, Clorox Company has it all. The management has in the recent past shown their prudent management of the Company judging from good and increasing returns that it posts year after year. The company has got the strong brands of products that would survive and thrive in any economic environment with surety of long-term sustainability. It is therefore my recommendation that Mr. Buffett should buy Clorox stocks as it would give him the required returns besides fulfilling his requirements of a good profitable and viable business. Works cited Carroll, Archie B, and Ann K. Buchholtz. Business & Society: Ethics and Stakeholder Management. Mason, OH: CL-South-Western Cengage Learning, 2010. Print. Sander, Peter J, and Scott Bobo. The 100 Best Stocks to Buy in 2013. Avon, Mass: Adams Media, 2012. Internet resource. Viebig, Jan, Armin Varmaz, and Thorsten Poddig. Equity Valuation: Models from Leading Investment Banks. Chichester, England: John Wiley & Sons, 2008. Print. Madden, Bartley J. Cfroi Valuation: A Total System Approach to Valuing the Firm. Oxford: Butterworth-Heinemann, 1999. Internet resource. Falcón, y T. M. J. Equity and Law. Leiden: Martinus Nijhoff Publishers, 2008. Internet resource. Read More