Tuesday, January 25, 2011

Clorox Company is fairly valued with a margin of safety


I believe $CLX, at approximately $63/share is fairly valued with a margin of safety on a cash flow valuation basis.

For nearly 100 years, Clorox has operated in the household product industry, expanding its portfolio to include such leading brands as Clorox, Glad, Hidden Valley, and Kingsford. The firm distributes its products through mass merchants, grocery stores, and other retail outlets. With its acquisition of Burt's Bees in 2007, Clorox gained entry into the fast-growing natural personal-care category. International sales amount to 20% of the firm's consolidated total.
(Source: Morningstar.com)
I estimated the firm's WACC at 6.38% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
YearFCF $Millions
2001555
2002699
2003598
2004727
2005614
2006342
2007562
2008560
2009541
2010616
TTM670
Average Annual Growth: approx 5%
CAGR: approx. 1%
Internal Growth Rate: approx. 8%
Consensus Forecast Industry 5-Year Growth: approx. 11% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
Assume the company achieves a lower 5-year growth rate of 5% per year, and assume that after the next five years, the company achieves no growth or 0% growth per year forever.
Discounted Cash Flow Valuation:
YearFCF $ Millions
0670
1704
2739
3776
4814
5855
Terminal Value14073
The firm's future cash flows, discounted at a WACC of 6.38%, give a present value for the entire firm (Debt + Equity) of $13,552 million. If the firm's fair value of debt is estimated at $2,930 million, then the fair value of the firm's equity could be $10,622 million.
$10,622 million / 139 million outstanding shares is approx $76 per share. A 20% margin of safety from here is approx $61 so I'd buy $CLX today at $61 or less.  I believe $CLX at $63/share is fairly valued with a margin of safety on a cash flow valuation basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

1 comment:

  1. Interesting discussions, Eric!

    Will you be interested in publishing this on value investing site GuruFocus.com?

    Please email charlie here: charlie at gurufocus dot com.

    thank you!

    Charlie.

    ReplyDelete