Clorox, a household name for less

Yesterday I initiated a position in The Clorox Company (CLX), which is a global manufacturer and marketer of consumer products. Along with their flagship Clorox line, they are the people behind household brands such as Armor All, Glad, Pine Sol and Brita. The company was actually acquired and divested from Procter & Gamble (PG) back in the 1960's. "We make everyday life better, every day" is the company's slogan.

Generally What I Like About Clorox
Going back to 1913, Clorox has been focused on their brands. Continuing to drive earnings through marketing, innovation, and distribution is their aim. At its core Clorox is a packaged chemicals company, more specifically a bleach company, however the company is evolving in an innovative direction. The recent acquisition of natural products company Burt's Bees , as well as the company's timely launch of their Green Works natural cleaning products line should be the catalysts for growth; and are two steps that I believe puts Clorox on a very solid footing for growth.

Great Company but why now?...The Valuation
Given the recent fears of a U.S. recession, consumer staple stocks have been in rally mode because of a flight to safety. These companies are seen as safe havens against recession as several of the goods that they manufacture would be purchased in spite of tough economic times. Stocks such as McDonalds (MCD), Colgate-Palmolive (CL), and Procter & Gamble (PG) have really run up in this environment and I would not currently consider them to be attractively valued due to this. Clorox has actually been an exception to this rule as some downward earning revisions and commodity cost (specifically resin) issues have had investors selling off this stock. Here are some of the key metrics for CLX that tend to indicate that the stock is very reasonable value today:

• current P/E of 17x is at or near a 10 year low
• current P/Sales of 1.57 is at or near a 10 year low
• the stock is undervalued by over 10% according to my conservative valuation model, which is based on an earnings growth rate of 10% and a P/E of 17x earnings
• current dividend yield of 2.8% is a 10 year high point
• the stock is trading at 2005 levels and CLX's EPS is $3.31 compared with $2.89 in 2005

Dividends and Earnings History

CLX has a solid history of consistency in earnings and dividend growth. Earnings have grown at an average compounded rate of about 10% over the past 5 years. During the same period dividends paid have grown by just over 12% average per annum. Their latest dividend increase was by 29%.

Summary

I think Clorox is a stable, boring, and excellent company with a bright future ahead of it. Their foray into natural products should prove to pay dividends, as they will likely be the cost leader in this area right out of the gate. Rising commodity costs are currently cutting into Clorox's margins, however I see this as a temporary situation, and they can likely pass on some of the burden. Implementing cost controls as well as getting past the restructuring costs associated with the Burt's Bees acquisition should put Clorox in a position to continue to grow earnings as the Burt's Bees and the Green Works line pan out. On the solid base of their brands, and strong marketing and innovation, and a weak U.S. dollar CLX should excel domestically and internationally. This is a rare opportunity to get a household name, and a great dividend growth company on the cheap.