Streetwise for Sunday Mar 22, 2009

Streetwise

Lauren Rudd

Sunday, March 22, 2009

Time To Do Your Research Is Now

As we move into the second quarter of the year, you want to be in a position to take advantage of bargains created by the recent volatility on Wall Street. Consequently, you will need at hand a researched list of investment candidates, detailing for each a price that in your mind constitutes value.

So, the time to do your research is now and not 20 minutes before deciding to place a buy order. If you are reticent to act and still mourning the loss of some paper profits, remember that 40 years of statistical data confirm an average annual compounded total rate of return for the equities markets of about 11 percent.

Yes, I am eminently familiar with the statement by famed economist John Maynard Keynes’s, “In the long run we are all dead.” At the same time, every journey begins with a first step. Furthermore, the potential gains going forward from today’s low share prices will likely repair any damage you may have suffered from the current economic downturn.

Nonetheless, stocks are ornery critters and Wall Street is not Main Street. Rose gardens do not exist and market volatility is the nature of the beast. Unfortunately, market volatility, combined with a fear of the unknown, readily foments paranoia.

Get over it. Investing is all about uncovering fundamental value and successful investing is well within your reach. You simply ignore the foreseers of doom, treat fundamental value as a religious doctrine and concentrate your research on companies whose past performance is one of growth and increased earnings. For example, one candidate meriting a closer look is Clorox, a household name among many families.

When I last wrote about Clorox a year ago, my earnings estimate for the company’s 2009 fiscal year was $3.85 per share, with a 12 month price target on the shares of $63, as compared to the recent price of $51.62. The dividend yield at the time was 2.81 percent.

Since then, Clorox has been beaten up a bit by the market, an undeserved fate meted out to many. For its second fiscal quarter ended December 31, CEO Don Knauss pointed out that shipments were lower due to retailer inventory reductions and soft consumer demand. However, the impact of price increases earlier in the fiscal year enabled the company to hold to its pricing models.

Clorox reported second-quarter net earnings of $86 million, or 62 cents per share. For the same period a year ago, net earnings were $92 million and 65 cents per share.

The company’s gross margin decreased 40 basis points (100 basis points equals one percent) to 40.0 percent due to the impact of higher costs for commodities, manufacturing and logistics. Nonetheless, second-quarter sales grew 3 percent coming in at $1.22 billion. Products from the Burt’s Bees® business, which Clorox acquired on Nov. 30, 2007, contributed 3 percentage points of sales growth.

Net cash provided by operations was $98 million, compared to $148 million in the year-ago quarter. The decrease was due primarily to the timing of tax and interest payments. The company continued using cash on hand and free cash flow to reduce debt during the quarter.

Clorox now anticipates a year-over-year gross margin improvement in the range of 50-100 basis points, rather than the previously estimated range of 25-75 basis points. In its guidance, Clorox indicated that it expects earnings in the range of $3.60 to $3.75 per share.