Clorox Company - Fundamental Investment Case

Qualitative Concerns:

• Clorox faces intense competition from their own customers, the top 5 of which make up half of revenue, as secular private label growth continues.
• Wal-Mart (26% of revenue), Amazon, Target, and Costco all have an increased focus on capturing private label dollars or at least using them to drive down pricing.
• Eco-friendly products could cause Clorox to lose share at the high end as well.
• Cost inflation and competition make price increases, volume gains and higher margins doubtful in FY19 as the market expects.

Fundamental Concerns:

• Sales and volume growth have already started to weaken. Volume in FY18 benefitting from acquisitions and divestitures but will be difficult to repeat in FY19.
• Gross margins already showed weakness before recent cost inflation from packaging, trucking, wages and advertising in the CPG space.
• Inventory trends and cost pressure make it unlikely the company can reverse EBIT margin declines.
• Long –term free cash flow yield has deteriorated due to capex increases.
• Despite the long-term headwinds, the multiple appears expensive especially on an EBITDA basis.