Clorox Stock Analysis – April, 2019

1. Analysts: Marcin Szczepaniak and Dhwani Mehta, presented on April 29th, 2019 Clorox Stock Analysis – April, 2019

2. Agenda

3. Stock Overview Recommendation: We recommend to add this stock to the watchlist as it is a good company but currently the price is close to the all time high. Source: graphic fromQ2 earnings presentation, page 5

4. About Clorox Clorox is a manufacturer and marketer of consumer products, spanning a wide array of categories from charcoal to cleaning supplies to salad dressing. Clorox was founded in 1913. The company is well-known brands include Brita, Clorox Bleach, Hidden Valley, Kingsford, Glad, and Pine-Sol, among many others. The Company operates through strategic business units (SBUs) that are aggregated into four reportable segments: Cleaning, Household, Lifestyle and International. In February 2018, the Company announced an increase of 14% in its quarterly dividend, marking 25 years of consecutive dividend increases

5. Clorox’s Strategic Focus and Long-term outlook • The Clorox Company’s 2020 Strategy serves as its strategic growth plan, directing the Company for long-term, profitable growth and total stockholder return. The long-term financial goals include annual net sales growth of 3-5%, annual EBIT margin growth of 25-50 basis points and annual free cash flow of 11-13% of net sales. • In international markets, Clorox continues to focus on execution of its Go Lean Strategy, which emphasizes driving the long-term profitability of its international business. • Clorox’s international business continues to play an important strategic role, with No. 1 or No. 2 brands in majority of categories and countries where we operate. • The Company anticipates using free cash flow to invest in the business, maintain appropriate debt levels and return excess cash to stockholders.

6. Long Term Growth Prospects Source: Q2 earnings presentation, page 14

7. Clorox has a strong track record of savings Cost savings are a way of life at Clorox and even after all of these years, it continues to make improvements to profitability. Source: Q2 earnings presentation, page 18

8. Clorox has a stream of revenue from a variety of products Clorox doesn’t have a major category that accounts for more than one-third of total sales and within those categories, no brand accounts for a significant portion of revenue on its own Source: Q2 earnings presentation, page 9

9. Clorox is an industry leader across its many product mixes Over 80% of global sales are from #1 or #2 market-share brands Source: Q2 earnings presentation, page 8

10. How The Clorox Company got here… 1970s-1980s 1980-1990s 2000s-Present Brand Building Expansion Diversification • Clorox begins to focuse on consumer megatrends that include sustainability, health & wellness, & affordability. • In 2007, the company acquired Burt’s Bees Lip Balm. • In 2008, Clorox Company became the first major CPG company to launch a green cleaning line, Green Works, into the mainstream cleaning aisle. • In 2018, Clorox purchased Nutranext for $700 million. Nutranext makes natural multivitamins and probiotics. • In 1988, Clorox struck a licensing-and-distribution agreement that brought Brita water filters to the U.S. • In 1990, Clorox purchased Pine-Sol. • In 1999, Clorox acquired First Brands. Such brands as Glad and Handi-Wipes became part of the portfolio and increased sales grew by ~40%. • The First Brands acquisition doubled the size of the company and helped it land on the Fortune 500 for the first time the following year. • Clorox pursued an aggressive expansion program in which it established itself as a major diversified consumer products conglomerate, like P&G.  • It acquired a number of brands that remain a part of their portfolio today, including: Formula 409, Liquid-Plumr, Kingsford Charcoaland it even acquired a ranch dressingthat was new to the market, which was known as "Hidden Valley”. In lockstep with the company’s strategy, Clorox expects to continue to seek acquisition opportunities

11. Management’s Plans for Free Cash Flows Clorox’s FCF affords it the ability to pay the $500 million annual dividend as well as buy back stock to boost earnings per share growth and still have plenty of cash left over Source: Q2 earnings presentation, page 23

12. Delivering Top-Tier ROIC Average invested capital represents a five quarter average of total assets less non-interest bearing liabilities Source: Q2 earnings presentation, page 20

13. Micro and Macro-economic Drivers Factors • Demographics) • The US population has grown steadily at an annualized 0.7% over the past five years to reach 330.2 million. The population growth rate has eased over the long term as family sizes have shrunk. • The population has expanded as longevity has increased thanks to medical innovation and improved health awareness. Combined with slowing new births, the balance has shifted toward an aging population, with the median age in the United States rising incrementally each year. • Cost to Produce/ Prices and Quantities Sold) • Sources and availability of raw materials – input costs have been going up. • Reduced availability of rail or trucking capacity has caused and could continue to cause us to incur unanticipated expenses, likewise with new regulations on truck drivers. • Consumer Trends and Spending) • Rise in beliefs that cleanliness = more productivity and widely established believe that germs cause diseases. • Consumer spending will be in line with general spending since Clorox handles many staple goods. Source: IBIS World Industry Market Research

14. SWOT Analysis Strengths Weaknesses • Steady growth across all product lines • Exhibited good fundamentals of returning capital to shareholders • Operational excellence • High customer concentration at 26% of sales for 2018 with Walmart • Sources and availability of raw materials – input costs have been going up. Opportunities Threats • Increase in consumer demand • Continuing to be a market leader of certain trends like Green Clean movements and Environment, Social, & Corporate Governance (ESG) practices • Significant international political risk and currency risks

15. Porter’s Five Forces Methodology Threat of Substitutes Threat of Competition Threats of New Entry Power of Buyers Power of Suppliers • LOW • Overall decline in domestic demands is expected to spur the exit of regional bleach manufacturers from the industry, which lack the competitive advantages of the industry’s larger enterprises. Therefore, the number of industry operators is expected to decline at an annualized rate of 1.3% to 45 over the five years to 2024. • MEDIUM • Clorox Company and Olin Corporation are expected to generate a substantial share of industry revenue.These companies earn higher profit margins than the remainder of industry operators, the growth in market share of these companies is expected to yield an increase in the average industry profit margins. Therefore, average industry profit (measured as EBIT) is expected to rise from 12.6% of revenue in 2019 to 13.1% in 2024. • MEDIUM • The Company’s sales are largely concentrated in the traditional retail grocery, mass retail outlet, warehouse club and dollar store channels. • One customer, Walmart, represents 26% of sales, but no other buyer represents more than 10% of sales. • HIGH • Volatility and increases in the costs of raw materials, including resin, soybean oil, solvent, corrugated cardboard and other chemicals and agricultural commodities, and increases in the cost of energy, transportation, labor and other necessary supplies or services have harmed, and may continue to harm, the Company’s profits and operating results. • HIGH • Substitutes pose a serious threat to profitability and growth in the Personal & Household Products. • Clorox faces a substitute problem in two ways. One is through product competition, the other through price competition.

16. Recent Company Performance • The Company’s fiscal year 2018 net sales increased by 3% to $6,124 in fiscal year 2018 from $5,973 in fiscal year 2017 , reflecting volume growth and the benefit of price increases, partially offset by unfavorable mix. • Gross margin decreased 100 basis points to 43.7% in fiscal year 2018 from 44.7% in fiscal year 2017 , reflecting higher manufacturing and logistics costs and unfavorable commodity costs, partially offset by cost savings and the benefit of price increases. • The Company reported earnings from continuing operations of $823 in fiscal year 2018 compared to $703 in fiscal year 2017 . The Company reported earnings from continuing operations before income taxes of $1,054 in fiscal year 2018 , compared to $1,033 in fiscal year 2017 . • The Company delivered diluted net EPS from continuing operations in fiscal year 2018 of $6.26 , an increase of approximately 17% or $0.91, from fiscal year 2017 diluted net EPS of $5.35 .

17. Weighted Average Cost of Capital

18. Sales Assumptions

19. Comparable Company Valuation

20. Discounted Cash Flow Analysis – Base Case . Value of share – 142.19

21. Discounted Cash Flow Analysis – Upside Case Value of share – 144.13

22. Discounted Cash Flow Analysis – Downside Case Value of share – 140.26

23. Profitability ratios

24. Liquidity Ratio

25. Final Recommendation Valuation Ranges GE-McKinsey Matrix • Comparables:174.85 • DCF:140.26-144.13 • Weighted cost:158.52 • Share Price:156.38 Invest/Grow Invest/Grow Watchlist Final Comments: high The industry generates stable demand from the millions of households and businesses that use bleach products for sanitation purposes. Therefore, growth is supported by the sheer the size of the domestic population. Since population swings are gradual, the industry is not anticipated to experience dramatic decline. We would recommend to put it on the watchlist till the price drops to $140.26, as this is the DCF price of our downside case Invest/Grow Watchlist Divest medium Industry Attractiveness (Growth) Watchlist Divest Divest low high medium low Competitive Strength

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