Can This Company Continue To Generate a 12.5% Return?

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As Clorox (NYSE: CLX) celebrates its centennial, I am settling in to take a look at its upcoming earnings call on February 4.  While it may not be the most enthralling company to ever grace the stock market with its presence, it has been one of the most successful.  Not only is Clorox a Dividend Aristocrat, but it was also highlighted by the Motley Fool's own, Morgan Housel, as one of 16 Painfully Boring Companies with Extraordinary Long-Term Returns.  

Posting average yearly returns of 12.5% since 1968, Clorox has proven that despite its boring industry, it is a true innovator in its space.  Riding these innovations to new highs yet again in 2012, the company has continued its run of success in the last decade, as it has watched its stock price soar 89%.  With a 3.3% dividend to go with such strong share appreciation, I am excited to tune into the company's upcoming earnings.

A 5 & 3 SWOT Analysis

Putting a slight spin on The Motley Fool's "5 & 3," I have tried to incorporate a mini SWOT analysis as we look forward to a company's upcoming earnings.  By highlighting 3 Opportunities and 2 Strengths, as well as 2 Threats and 1 major Weakness, I am able to come up with a modified 5 & 3 that provides a look not only towards the company's future, but its current state as well.

3 Opportunities

1) Geographical and Target Market Expansion- International operations account for 22% of revenues from Clorox, with roughly 1/3 coming from developed countries and 2/3 coming from developing countries.  After deciding to wait on expansion in China and India, Clorox will look for further growth in North America and South America.  As they continue to hone in on the Hispanic community, they hope to dominate through marketing as they have 100% share of voice.

China and India display the true long-term growth story however, simply for their size if nothing else.  As Clorox looks to build up its capital for a strong venture into these countries, they will have to rely upon further Hispanic expansion and product innovation for growth.  Look for signs of international growth, Hispanic, Asian, or otherwise in their Q2 earnings call.

2) Acquisitions- By acquiring Aplicare and Health Link, Clorox continues to supplement its organic growth and set up long-term growth runways.  With these acquisitions, they plan on bolstering the professional products segment of their portfolio, which only accounts for 4% of overall revenues.  

After announcing that the acquisition would be slightly dilutive for fiscal 2012, we will have to check in on this segments growth, as the two companies represented more than 1 percent of Clorox's revenues at the time they were acquired.

3) Share Repurchasing- Over the last 10 years, Clorox has dropped its shares outstanding by 40%, from 221 million to 132 million.  With an additional $820 million remaining on its share repurchase program, they have the opportunity to buyback over 10 million shares whenever they decide to pull the trigger.  Share price and all things remaining equal, a full exhaustion of the $820 million would represent a 7% appreciation for shareholders.

Look for a possible announcement of further buybacks in their upcoming call.

2 Strengths

1) Brands- 90% of its brands either have the leading share, or the second best share of their specific market.  With Clorox Bleach, Brita Filters, and Kingsford Charcoal each dominating their market, the company can focus on trying to expand its reach and grow its second place brands.  Furthermore, Clorox leads the salad dressing market with its Hidden Valley brand, and is 2nd in the trash bag, kitty litter, and through the wash markets.

Monitor further expansion of these brands' market share in the upcoming earnings call.  Maintaining these key brands would be pivotal towards deciding what products may move into a new geographical market. 

2) Innovation- Innovation not only drives new sales for Clorox, but it has proven to be the company's leading way of acquiring brand loyalty.  By innovating and creating new products that are precisely what consumers are looking for, Clorox has slowly begun to dominate in consumer wins.  Using a 60-40% basis of consumer preference as a win, they currently boast a 50% winning percentage.  Simply put, half of their products are what consumers prefer as a whole, and that is incredibly powerful.

While this may be hard, if not impossible to monitor on a quarter to quarter basis, look for any evidence of continued consumer preference as the company goes forward.

2 Threats

1 & 2) Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL) represent two of the biggest threats to Clorox's future success.  Holding market caps of $193 and $52 Billion respectively, P&G and CL dwarf Clorox's small(ish) existence as a $10 billion company.  Furthermore, and perhaps more importantly, P&G and CL are big-time international companies, which Clorox cannot yet say.

With only 20% of its revenues coming from North America, CL is firmly entrenched internationally and actually has a larger share of its revenues coming from South America, which registers 27%.  Similarly, P&G has embraced international expansion, so much so that it simply reports its business operations as 3 global segments, rather than geographical segments.  

While Clorox will be able to penetrate new markets with time, they will be at a massive disadvantage against not only these two behemoths, but many others (Kimberly-Clark, Unilever, Kraft, etc.).  Having to play catch up, Clorox will need to rely on its innovation abilities to spur its international growth and create new niche markets abroad.

One Major Weakness

1) Growth- While it has been constant, the growth story at Clorox has always been slow and steady, particularly of late.  With an annual sales growth goal of 3%, Clorox will readily admit that it is not shooting for the stars.  Over the last decade, they have bumped up revenues at a clip of 2.5% a year and have largely shied away from international growth outside of Canada and South America.

Look to see if Clorox is able to generate its expected 3% sales growth yoy.  More importantly, we will have to see if growth continues to come from innovation, or starts to come internationally.

Foolish Bottom Line

True growth may lie ahead, but Clorox does not seem to be in a rush to find it.  If that is something you can't stomach as a long term investor, it may be best to stay away.  However, this is a company that shows consistent 3% revenue growth, consistent EPS growth, consistent share repurchasing, and a dividend that yields 3.3% and has grown every year for 36 years.  Throw this and its recession proof industry into consideration and I believe Clorox makes a safe, high quality long-term holding.

While I see Clorox as slightly expensive today, it is only a McCormick drop or slight earnings miss away from being in my portfolio for a long, long time. 

joryko has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of The Clorox Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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