Streetwise for Mar 28,  2010

Streetwise

Lauren Rudd

Sunday, March 28, 2010

If Only Clorox Could Disinfect Congress

Your primary investment objective should always be to achieve financial returns in excess of what you will lose through taxes and inflation. Now I know what you are thinking, given all that has happened in the world, is this really the time to invest in stocks? Absolutely! In fact, I believe in equities now more than ever.

Yes, Wall Street can point to an unenviable record of having an over abundance of greed and stupidity. As a result, many companies saw their share prices unfairly and undeservedly beaten down to unjustified levels. To make matters worse, our elected congressional representatives are so busy bickering, back-biting and playing one-upmanship that it will be a surprise if financial reform ever comes to pass.

Expecting Congress to take rational decisive action on a subject as complex as financial regulation, while being plied with fervent attacks from lobbyists whose clients revel in an unregulated environment at taxpayer expense, is idealistic. However, Washington’s antics should not be a deciding factor in your tactical investment strategy.

Yes, stocks are ornery critters and Wall Street is no bed of roses. Market volatility, combined with a fear of the unknown, readily foments paranoia. Get over it. Understand that the critical part of investing is carrying out sufficient research...in advance, not 20 minutes before deciding to place a buy order.

Successful investing is all about uncovering fundamental value and it 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. A good example is Clorox.

When I last wrote about the company a year ago, my earnings estimate for Clorox’s fiscal year ended June 10, 2009, was $3.72 per share with a 12-month projected share price of $60. Earnings came in at $3.81 per share and the shares recently closed at $64.85.

Last month Clorox reported second-quarter earnings of $0.77 per share as compared to $0.61 in the year-ago quarter, an increase of 26 percent. Earnings benefited from higher sales of disinfecting products in response to demand associated with the H1N1 flu pandemic and robust gross margin expansion. These positive factors were partially offset by pretax losses of $0.09 cents per share related to the company's Venezuela operations.

Total volume increased 5 percent due to higher shipments of disinfecting products, Brita water-filtration products as well as other major brands. Sales increased 5 percent to $1.28 billion, of which foreign exchange rates accounted for 1.7 percent of that increase. The increase was largely offset by greater trade promotion spending in response to competitive activity.

Nonetheless, the company’s gross margin increased 3.9 percent to 43.9 percent from 40 percent, due to lower commodity costs, increased frugality and price increases in international markets. Again, the gains were partially offset by higher manufacturing and logistics costs, along with increased trade promotion spending.

Net cash provided by operations increased 55 percent to $152 million from $98 million in the year-ago quarter. The increase was primarily due to higher net earnings and the positive cash impact of changes in working capital.

Last November, the company issued $300 million of six-year senior notes at a fixed interest rate of 3.55 percent to partially refinance $575 million of 4.2 percent notes that matured in January 2010.