Clorox (CLX)
Clorox may be executing the best in its peer group. In its fiscal fourth-quarter report, released August 3, reported sales advanced 4% as the company drove an 11% increase in diluted earnings per share in the period. The pace of top-line expansion would have been even better were it not for currency-related headwinds. A benign combination of “cost savings, price increases and lower commodity costs” worked wonders on the firm’s financials.
During the quarter, Clorox recorded 3% volume growth, and the company continues to gain share across its brand portfolio. Clorox disinfecting wipes continue to fly off the shelves at a double-digit pace at retailers, and the firm pushed a nice price increase on Clorox bleach in February 2015. Premium trash bags continue to be in demand across the firm’s Glad, OdorShield and Gain line-up, and Burt’s Bees face and lip-care products continue to perform well. The product-driven performance helped net cash provided by operations during fiscal 2015 increase 9% over last year’s mark.
Looking to fiscal 2016, management is targeting 3%-4% currency-neutral sales growth and 25-50 basis points of EBIT-margin expansion, which should translate into diluted earnings per share in the $4.68-$4.83 per share range. The benign combination of “cost savings, price increases and lower commodity costs” is expected to carry into the first half of the fiscal year, helping offset challenges from slowing international economies. We’re huge fans of Clorox’s fundamentals, but its net debt position continues to pressure its Dividend Cushion ratio, which stands at 1.2 – not bad, but not fantastic either. The company is yielding ~2.8% at the time of this writing.
Shares are breaking out…
Colgate-Palmolive (CL)
Colgate-Palmolive is perhaps dealing with the harshest currency headwinds across its peer group. In the firm’s second-quarter report, released July 30, the company noted that foreign exchange hurt its top line by an incredible 12%. A unit volume increase of 3% and pricing growth of 2.5% were noteworthy in the period, but the magnitude of foreign-exchange pressures was simply too much to overcome, even if it can be classified as non-core. Absent currency headwinds, adjusted diluted earnings per share would have increased at a double-digit pace, but reported numbers dropped at a mid-single-digit clip.
Unlike peers that have been benefiting from margin expansion, either through productivity savings or price increases or both, Colgate-Palmolive suffered a 50 basis-point contraction in its gross margin during the second quarter as higher raw material and packaging costs ate into profits. Lower SG&A costs as a percentage of revenue helped the operating line, but we’d like to see Colgate-Palmolive sort out issues on the gross-margin line rather than cut sales and marketing spend, the latter core to driving volume trends across its portfolio. Through the first half of 2015, net cash from operations at Colgate-Palmolive dropped to $1.22 billion from $1.39 billion in the comparable 2014 period.
On an organic basis, Colgate-Palmolive seems to be putting up the best numbers among peers: in the quarter, “all operating divisions contributed to the 5.5% worldwide organic sales growth, led by emerging markets where organic sales grew a strong 7.5%, despite economic challenges in certain countries.” The company continues to take share in both the global toothpaste and the manual toothbrush markets, and we wouldn’t expect that to change anytime soon. Though Colgate-Palmolive’s long-term goal of double-digit annual earnings per share growth remains unchanged, currency headwinds aren’t making things easy. Shares register a 1.8 on the Dividend Cushion ratio and yield ~2.3% at the time of this writing.
Colgate-Palmolive has raised its dividend in each year for the past half century.
Helen of Troy (HELE)
We know several of our members own this company thanks to its 9 rating on the Valuentum Buying Index in June 2012 at ~$34 per share. The company is approaching $90 per share at present, and we hope members are happy with the performance of this idea sourced from the Valuentum Buying Index distribution.
For those that may not have heard of Helen of Troy, the company is a global developer and distributor of an expanding portfolio of brand-name consumer products. It operates under four business segments: Personal Care (e.g. Vidal Sassoon, Dr. Scholl’s), Housewares (e.g. OXO), Healthcare/Home Environment (e.g. Braun, Febreze), and Nutritional Supplements (e.g. Omega Q, OxyRub). The company’s first-quarter fiscal 2016 results, released July 9, revealed a business that is profiting from double-digit increases in both revenue and adjusted diluted earnings per share. Helen of Troy has been benefiting greatly from savvy acquisitions, including Vicks VapoSteam and Healthy Directions, as it looks to roll out as many as 300+ new products per annum.
Looking ahead to fiscal 2016, Helen of Troy expects consolidated net sales in the range of $1.485-$1.536 billion and non-GAAP diluted earnings per share in the range of $5.40-$5.85 per share. That puts shares trading at just 15 times the high end of the non-GAAP bottom-line guidance range. Though our fair value estimate remains shy of its current share price, we can’t say shares are expensive, especially as Helen of Troy’s brand portfolio is enhanced by Procter & Gamble’s divested Vicks brand. We wouldn’t be surprised to see the company reap an earnings multiple more in-line with its peer group in coming years thanks to portfolio development.
Helen of Troy has been a big winner during the past few years.
Libbey (LBY)
For those that don’t know Libbey, the company dominates the glass tableware market in North America, which accounts for nearly all of its sales. Libbey’s products include glass tableware, ceramic dinnerware, metal flatware, and serve-ware. The company sells more than 1 billion glasses annually and releases new glassware shapes and tableware items each year. Replacement sales (a predictable revenue stream) are ~90% of its US foodservice glassware sales, and 50%+ of its products are made in low-cost countries (Mexico, China). Onlookers worry, however, that its products aren’t differentiated enough and that a competitive edge cannot be garnered, thereby limiting its pricing power.
Though such an argument holds merit to a degree, Libbey was a “hidden” valuation opportunity when the company registered a 9 on the Valuentum Buying Index in October 2012 at $15 per share. Shares have subsequently surged to nearly $40 each as they continue to approach our fair value estimate. We don’t think the company has quite the brand strength of a Clorox, Colgate-Palmolive, or Procter & Gamble, but it has performed quite well the past few years. Through the first half of 2015, Libbey achieved revenue growth of 4.5% on a constant-currency basis, and while it has faced adjusted net-income pressure, its core foodservice business has outperformed industry trends.
Peers trade at lofty comparable multiples, but Libbey is only fetching ~14 times 2016 adjusted earnings per share at its current price, a rare relative value. We’re watching Libbey closely, even as we stay on the sidelines with respect to shares. The company doesn’t necessarily have the yield support of its peers, making its share price more susceptible to volatile moves, in our opinion. Libbey yields ~1.2% at the time of this writing.
Procter & Gamble (PG)
Procter & Gamble is no longer the company it once was, literally.
P&G is shedding a significant number of its tried-and-true brands, and the analyst community continues to struggle to get its head around this “new” entity that will also be under new management. Group President of Global Beauty, Grooming and Health Care David S. Taylor will succeed A.G. Lafley effective November 1. In our view, we’re dealing with a completely different company that is pursuing a much more concentrated brand strategy, and one that perhaps should not receive the free pass of being…well…“Procter & Gamble.” The future may not be like the past.
For the fiscal year 2015 (ends June 30), Procter & Gamble grew organic sales at a modest 1% pace, while core earnings per share came in at $4.02, falling 2% from the year-ago period. The firm retains the pricing power behind its core brands, and we continue to point to this attribute as P&G’s most valuable one. Core gross margin advanced 30 basis points during the fiscal year and 80 basis points on a currency-neutral basis. Helping drive the improved margin is a focus on productivity cost savings, which more than offset higher commodity input costs. During fiscal 2015, Procter & Gamble generated $14.6 billion in operating cash flow, recorded adjusted free cash flow productivity greater than 100%, and registered the 59th consecutive year of dividend increases.
Fiscal 2016 won’t be a walk in the park for the household products giant, however. Reported net sales are expected to fall at a low-single-digit pace during the fiscal year, as the company targets adjusted earnings per share to be “slightly below to up mid-single digits” versus fiscal 2015 core restated earnings per share of $3.77. Organic performance may come in slightly better on the top line, but we think the new executive team will still be digesting the portfolio moves during the year, which could be distracting. We’re holding strong with our Procter & Gamble shares in the Dividend Growth Newsletter portfolio even as we called its recent move toward the mid-$70s. Shares yield 3.3% at the time of this writing.
P&G’s Dividend Cushion ratio is 1.5.