CLX Downgraded to Neutral

Recently, we have downgraded our long-term ‘Neutral’ recommendation on California-based The Clorox Company (CLX - Analyst Report). Our recommendation is based on the company’s declining volume, uncertainty in Venezuela and the tough macro-economic situation.

Clorox recently reported its first quarter 2013 results. In the quarter, the company’s total volume edged down 1% primarily due to increased pricing resulting from passing of higher input costs to consumers. Further, we believe that any further rise in raw material prices will lead to increased pricing of Clorox’s products, which may adversely affect its volume, and henceforth the total sales.

Moreover, Clorox has a substantial exposure in Venezuela, due to which it may face difficulties in maintaining its profitability if the Venezuelan government restricts pricing decision of the companies to offset the possible rise in raw material prices.

Another negative point for the company is its highly leveraged balance sheet with long-term debt of $1,571 million and debt-to-capitalization ratio of over 109%, recorded at the end of fiscal 2012. The high debt level may adversely affect the company’s financial flexibility as well as its ability to pursue acquisitions or expand operations organically.

On the other side, we are impressed with Clorox’s cost-saving initiatives, which helped earnings in first-quarter 2013 to increase by 3% to $1.01 per share, beating the Zacks Consensus Estimate of 95 cents. Net sales elevated 2.5% year over year primarily due to increased pricing, offset in part by lower volumes and unfavorable foreign exchange.

Further, the company confirmed its fiscal 2013 earnings guidance between $4.20 and $4.35 per share. Moreover, we expect the company’s charcoal and bleach sales to improve in second-quarter due to the damage caused by hurricane Sandy in the East Coast region.

Moreover, Clorox's diversified brand portfolio positions it well above its peers to generate above-average industry growth and sustain itself in the current challenging environment. Going forward, Clorox has decided to tap the opportunities available in Middle East and other growing Asian countries. We believe that with less competitiveness and penetration along with healthy population and rising household income, these countries will provide huge growth potential for the company.

Considering these above factors, it can be stated that the investors should wait to own this stock until its strategic initiatives reflect better visibility.

One of the company’s peers Colgate-Palmolive Co. (CL - Analyst Report) also carries a long-term ‘Neutral’ recommendation on the stock.