Will Clorox Valuation Hold Up to Its 2020 Strategic and Growth Plans?

Clorox Co. (NYSE: CLX) is considered to be one of the slow-growth defensive stocks that investors love to own through good times and bad. That being said, companies issuing five-year or longer strategic and growth plans often find themselves unable to meet expectations, even if they are low, due to unexpected events. So, should Clorox be issuing (or reissuing) very long-term stated growth and strategic plans?

There is at least some reason to be concerned here, but before anyone hits a panic button, note that Clorox has some of the best brands among peers and it is a highly defensive stock. The caution would be over a premium market valuation and a lower dividend than peers. Analysts also have a mixed picture, with the consensus view at a lower price than the current share price.

At Thursday’s analyst day event, Clorox’s management highlighted its progress against the company’s 2020 Strategy. That strategy was actually introduced back in 2013. While these efforts are not set in stone and may change, Clorox included its four highest-value opportunities or strategy accelerators. All in all, Clorox is targeting net sales growth of 3% to 5% annually, expanding its EBIT margin by 25 to 50 basis points annually and generating free cash flow of 10% to 12% of sales annually.

As far as what else investors may look at in Clorox, the stock is valued at almost 24 times expected 2016 earnings and roughly 22 times expected 2017 earnings. It also comes with a 2.8% dividend yield. Clorox is valued at a higher earnings multiple than its two largest peers in consumer products, and it comes with a lower dividend yield that is constrained by its traditional earnings multiple used to calculate maximum and acceptable dividends.

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Clorox shares were last seen down 0.5% at $114.95. It has a 52-week range of $95.19 to $119.75 and a consensus analyst price target of roughly $111.00. That being said, its highest analyst price target is $122.00 and its lowest is $92.00.

24/7 Wall St. has significantly shortened up the company’s four key drivers mentioned above. The reason is that we are not trying to highlight their work for them, but wondering if such long-term published views are safe and solid practices for businesses.

The first mention was Clorox’s Portfolio Momentum of leading brands bringing a competitive advantage, with an opportunity to maximize profitable growth by looking at the growth brands and the fuel brands.

The second such target was 3D Innovation. These are for Clorox’s demand-creation model and are called to drive category increases, market share leadership and profitable growth as follows:

• Desire (pre-purchase communications)
• Decide (point-of-purchase communications)
• Delight (post-purchase product experience)

The third such target is 3D Technology Transformation, or how Clorox is leading the consumer packaged goods industry in the evolution of digital marketing. Some 40% or so of its media spending is to digital channels.

The last of the four targets was its Growth Culture with profitable growth, with employees who are innovative, externally focused and decisive in driving the business.

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Many of these are feel-good statements. They also included much more detail in the press release. Clorox is sending the message to investors that it still wants to grow and still wants to look for opportunities. A prior effort from Clorox, which was not the focal point of this week’s target, was that Clorox’s goal was to make sustainability improvements to more than 50% of its product portfolio by 2020.

Clorox CEO Benno Dorer said:

The 2020 Strategy is focused on accelerating growth profitably, consistently and responsibly. In fiscal year 2015, strong execution of our strategy, including incremental demand-building investments, drove great results, such as 3 percent sales growth, 5 percent sales growth on a currency-neutral basis, as well as momentum in our categories and market share increases across many brands. Moving forward, a continued focus on our strategy accelerators and strong execution across our demand-creation programs and operations will be key to helping us continue delivering profitable, sustained growth.

The good news is that Clorox’s outline does not seem as set-in-stone like IBM did in the past, targeting earnings per share growth at any cost. That move ended up biting the company. Now we just have to see if Clorox can deliver, and if it can live up to its premium valuation against peers.