Few companies qualify as widow-and-orphan stocks. Those that do share a common attribute: they own or are strong, persistent consumer brands. Companies such as Proctor & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), Altria Group (NYSE: MO) and MacDonald's (NYSE: MCD) qualify.

Arguably on the cusp of window-and-orphan status is Clorox (NYSE: CLX), whose major brands include its eponymous bleach, Formula 409, Liquid-Plumr, Pine-Sol, Tilex, S.O.S., Brita, Hidden Valley Ranch, Glad, Kingsford, Armor All and STP.

Though its products are staples in many households, Clorox has, nevertheless, been a volatile performer in recent years.

In part, the volatility is due to the seasonal nature of a few of its products, like Kingsford, but more so because of energy and raw-material costs. On that front, Clorox absorbed $170 million of these costs in 2006 alone.

Calmer Waters Ahead
But Clorox appears to be steadying its operations and getting a handle on costs, at least if recent numbers are any indication.

Revenue for the second quarter of 2007 grew 3.5% to $1.10 billion, operating margins improved 115 basis points to 17.5%, and income from continuing operations rose 9.6% to $91 million over the year-ago quarter.

For the remainder of the year, revenue is expected to increase 4%, reflecting volume growth driven by new product introductions, price increases and the acquisition of Colgate-Palmolive's (NYSE: CL) bleach businesses in Canada and Latin America. Meanwhile, earnings per share should increase in the $3.20 to $3.28 range, 12.5% higher than 2006's EPS of $2.89.

Reducing Risk
In consumer products, competition from private-label brands and retailer leverage, from mega-chain stores such as Wal-Mart (NYSE: WMT), is always a concern, but I believe it's one that's overdone at times. The popularity of leading brands contributes to increased pricing-power and stronger cash flow for industry leaders, often at the expense of generic competitors -- which are usually inferior anyway (for proof, drink a store-brand cola).

Of greater concern to Clorox investors is financial risk. In November 2004, the company completed a complicated exchange of its ownership interest in a subsidiary for approximately 61.4 million of its shares held by Germany's Henkel KGaA. The exchange included Clorox's existing insecticides and Soft Scrub cleaner businesses, its 20% interest in the Henkel Iberica, S.A. joint venture, and approximately $2.1 billion in cash.

The $2.1 billion in cash forced Clorox to load up on debt, which ballooned to 128% of total capitalization and turned owner's equity negative.

Fortunately, Clorox's prodigious cash-generating ability has enabled it to readily service and amortize the debt ($600 million has been amortized to date). On that front, the company netted $122 million in operating cash flow in the second quarter of 2007, which was sufficient to not only handle the debt, but to fund the company's share repurchase program and its dividend obligation -- recently hiked 7% to $1.24 per share.

Room to Move
Clorox is currently trading at 21-times its 2007 EPS estimate, which is in line with its average P/E ratio over the past five years. My 12-month price target is $72, and is based on a blended P/E and DCF analysis, which includes a 10% discount rate, 8% average annual EPS growth over the next three years and 5% annual EPS growth in perpetuity.

My analysis could be conservative. Further out, I think Clorox's potential is even greater, especially after the debt is reduced to normal capitalization levels (25%-30% of total capitalization) and more cash is allocated for investment and product development. Once its financial house is in order, Clorox could indeed achieve widow-and-orphan status.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center