A friend recently asked my opinion on keeping his stock in Clorox (CLX). He said he had bought some a while ago, and had ridden the stock up. It currently sits around 134. I last analyzed the stock back in 2015, when I deemed that its price of 112 was too overvalued. I can post a video on how I eyeball and value a stock sometime later. For now, I will focus it on this post. Note, this is how I “eyeball” it…a deeper analysis can be done using discounted cash flows, return on equity, etc. If you are new to investing, please watch this video first before you start: How to Start in Investing
Company Profile
The company is known for its brand of bleach and household cleaning supplies. It has a best-in-breed brand, and is widely trusted. This company should be around 10 years from now.
Growth rates
The first thing I look at is the sales and earnings growth. I use Value Line to get my numbers. The sales growth has clocked in around 5%, and projected to be 4%/year in the next 5 years. This is not stellar growth. A stable company with low growth rates should not command a premium.
Price valuation
Next, I move to the P/E. You calculate the PE by taking the current price of the stock and divide it by the earnings. You can view this as the “years to breakeven” if you bought the stock and the earnings stayed flat. So a P/E of 26 (CLX’s current PE) means that you will get your money back in 26 years, assuming the earnings don’t grow. This breakeven number is just today’s snapshot, and can grow or shrink based on earnings growing or shrinking, or on the price you buy the stock.
Yield on Investment
If you invert the P/E, you have an E/P, which is the yield on your investment. 134/5.06 = 26 PE, and the inverse 5.06/134 = 3.7%. In a risky instrument, such as a stock, you are earning a shade below 4%. Not enticing.
The PEG
Lastly, to normalize the PE ratio in terms of its growth rate (higher growth rate companies do command higher PEs), look at the PEG….you calculate the PEG by taking the PE and divide by the earnings growth rate. The estimated earnings growth rate for the next 5 years is around 7%. So, a 26 PE divided by 7 = 3.7. Whoah, nelly! A general rule of thumb: PEG of less than 1 is a buy, 1 to 1.5 is a hold, and 1.5 to 2 is a marginal hold, and anything over 2 is a sell. A 3.7 is a get the heck out.
Growth rates
CLX is not a stock that will go to 0 anytime soon, so in terms of losing “all your money”, you’re going to be ok. CLX pays a nice 2.48% dividend, which is 3.36/year in a check written out to you. However, I believe there will be a better entry point into this stock, and paying 134 for a 3.36 when this stock could lose 20-30 points is risky.
Disclaimer
I am not a registered investment advisor, so I do this for educational purposes only. You should take your own financial habits, risk tolerance and tax situations into consideration when deciding what to do for yourself.
