Clorox Overvalued, Procter & Gamble Undervalued
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumer goods stocks are often the best way to play a full recovery. But who knows when that is coming? If you put too much of your portfolio into consumer goods, there may be little left over to invest in stocks that you know are good right now. Still, that doesn't mean you shouldn't diversify.
While I find Clorox (NYSE: CLX) to be both overvalued and dead money, I think Procter & Gamble (NYSE: PG) is a low-risk and attractive stock to back. If you take a look at Clorox, you'll see that it trades at a respective 17.7x and 15.7x past and forward earnings with a dividend yield of 3.5%. As attractive as this dividend yield is, I think the financial position to support it is getting shaky with a quick ratio of less than 0.5. Volatility may be well below that of the market, but analysts still rate the stock a 2.9 out of 5 where "5" is a "sell."
It is also strange that the company is valued at a premium to its historical 5-year 16.6x multiple while operational trends have been less than promising. Free cash flow for the TTM ending 2Q12 was $420 million versus $470 million in 2Q11 and $618 million in 2Q10. Billionaire activist investor Carl Icahn earlier targeted the company and was pushing for a sale that went nowhere. While he is completely right that a buyout would be very accretive to large consumer good firms and that management has done much less than par, he is wrong, in my view, about Clorox being worth an investment in and of itself.
Having worked on activist campaigns before, I feel as though Icahn did not go independent on the sale. He was trying to hold management accountable, introduce ideas, and catalyze value through those ideas (some of which will be implemented, others will not). Put differently, he probably felt that Clorox was undervalued in and of itself. My view is that its premium is unwarranted. By contrast, great consumer good brands like Mattel (NASDAQ: MAT), the maker of Barbie, trade irrationally at low multiples. In fact, Mattel is only valued at 13.2x forward earnings with a 3.5% dividend yield. Management is very shareholder-friendly in its capital allocation policy, so the firm would be an unlikely activist target. Over the years, dividend distributions have grown markedly and thus it is an ideal stock for defensive investors. It is equally ideal for high-growth investors given that Barbie toys are now being actively pushed into emerging markets.
By contrast, Procter & Gamble looks attractive as always. The company is led by top management in its field and is a global brand well known for its household products for consumers and defensiveness for shareholders. Speaking of defensiveness, Procter & Gamble is quite safe at a low debt-to-equity, a beta south of 0.5, and a 3.3% dividend yield.
All in all, however, it is the product portfolio that makes Procter & Gamble worthy of a defensive "buy." They sell products for babies, adults, seniors. They sell toilet paper, toothpaste, washing material, personal grooming, feminine care, diapers, and so on and so on. And for nearly six decades, this titan has been paying dividends and increasing them. Even during the challenging times in the US economy, Procter & Gamble has managed to grow.
Rising consumer trends are secular in places like China and India. We need companies to get a footprint in those regions now and secure a brand value so that it can ride the "rising tide." With this aside, the company is still worthy of a "buy." New products from Swiffer cleaning to Febreze odor fresheners also reflect management's commitment to staying on the cutting-edge and outperforming broader indices. My one dismay is that the company is not getting aggressive on emerging markets. This attitude may be attractive to short-term investors, but it will not pay off in the long-run. Avon Products (NYSE: AVP), despite all of its problems, has been successful in taking on high-growth markets. Brazil has done well for the firm, and it is now attempting to turnaround operations in other companies through adopting what worked elsewhere. Procter & Gamble should take the same strategy that has worked domestically on an international scale and tweak it where cultural differences necessitate change.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company and Mattel. Motley Fool newsletter services recommend Mattel and The Procter & Gamble 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.If you have questions about this post or the Fool’s blog network, click here for information.