Final Investments Project

Household ProductsAdvanced Level Exhibits

Kyle Kolberg

Industry and Company Analysis

INDUSTRY ANALYSIS

To begin with the industry analysis, we must examine the large companies that dominate the household products industry. Besides Kimberly-Clark (KMB) and Clorox which I will be analyzing individually, the other major companies are The Proctor and Gamble Co. (PG), Unilever (UL), and The Colgate-Palmolive Company (CL). Beauty, grooming, fabric and home care, health and baby care, and family care products are all involved within this industry and represented by those companies just mentioned. This industry produces household non-durable goods. These product’s demand is generally not significantly affected by changes in large economic variables. Percent by market share calculated by revenues is laid out by Proctor Gamble (19%), Unilever (15%), Kimberly-Clark (5%), Colgate-Palmolive (4%), and The Clorox Company (CLX) (1%).

Looking into some of the famous brands of these companies, we can notice at a more grass-root level their products and how they play a role in our lives. For Proctor and Gamble, Bounty, Charmin, Pampers, and Tide, are four of their major holdings in terms of product brands. When we look at Unilever, Dove, Sunsilk, Lux, and Rexona are all popular brands (19, Seidman). Colgate is mainly self-explanatory with their brands. Basically their brands of toothbrushes, toothpaste, and mouth rinses can be found in any personal hygiene section at a store carrying Colgate products. Huggies, Kleenex, Scott, and Depend are all brands of Kimberly Clark (20, Seidman). Lastly, a few of Clorox’s brands include Burt’s Bees, Glad, and Liquid Plumr.

Over the past 15 years, these companies have generally been outperforming the S&P 500. These companies positive growths can be attributed to factors including: expansion in emerging markets, mergers and acquisitions and players’ pricing power. In the years 2009 through 2012, the household and personal products industry revenue has increased at a rate of 8.5% while the rest of the market edged up only at 1.8%. That is very substantial in that they are really diversifying themselves by entering new international and emerging markets. Although, there is speculation that their earnings currently are inflated because of their large investment in international markets. Some believe their earnings cannot continue to grow at the rate they are currently because they are running out of possible markets to invest in. (5, Cramer)

Historically these household products companies have been a fantastic example of acquiring companies that benefit their overall company. Management of these companies commonly seeks out and acquires small outfits or products that complement their existing products. (15, Serena) An example of this was when Proctor and Gamble acquired Gillette to diversify and fortify their business model. Proctor and Gamble, at the time before the purchase of Gillette, was known as a supplier for mainly women. Gillette is generally considered a company that targets towards the male population with razors and body wash. By purchasing Gillette, they enlarged their overall market population creating more opportunity for growth and profit. (18. WSJ Editors)

The largest strength of this industry, without a doubt, is having a defense like the 1985 Chicago Bears (arguably the best defense in the history of football). This industry can be classified as a defensive investment as they are generally less elastic than the overall market with a typically low beta. The industry performs well during good economic times, yet they provide firm downside protection in a retracting market. This industry is well established which leads to steady earnings streams throughout the business cycle. (8, Gondo)

The Clorox Company Analysis

The Clorox Company (CLX) is an extremely differentiated company that carries a tremendous amount of products that include brands of “Pine-Sol,” “Hidden Valley,” “Glad,” “Fresh Step,” “Brita,” and “Kingsford.” As one can see, they have products in everything from dressings and sauces to charcoal and cat litter. According to Clorox, they are 93 of their brands are number one or number two in market share within their individual markets (2, The Clorox Company contributors). Overall most of their products can be broken down into categories of: cleaning, household, international, and lifestyle products. Throughout this analysis, topics will include their customers, their source of revenue, comparison to the average U.S. Company, concerning threats, and overall strengths.

First looking at Clorox’s customers they sell to, Walmart jumps out initially. Walmart accounts for about 26% of Clorox’s net sales (1, NA). These sales are primarily within North America due to the large presence of Walmart within the United States. This is substantial. This means that The Clorox Company naturally has a correlation with Walmart as if their sales slow intuitively so will The Clorox Company’s. Less people in the store means less opportunity for Clorox’s products to be viewed within the store that is then followed by a lack of purchase. Besides Walmart, products are marketed and sold to wholesalers, grocery stores, third party distributors, and retail stores. Hospitals are also becoming an opportunity market for them. Their CEO Don Knauss in June of 2012 during an interview for an article with the Wall Street Journal had this to say, “In 2007 the health-care business was $2 million in sales, it grew to $34 million in sales last fiscal year. Our goal is to reach more than $100 million in fiscal year 2013 and about $300 million in fiscal year 2017. About 100,000 people are dying each year in U.S. hospitals because of hospital-wide infections. We could offer solutions to those problems.” Although Don Knauss is no longer the CEO as of July 1st this year, it is still extremely telling that Clorox is continually looking on expanding into new markets decade after decade (7, Glazer).

For an investor, The Clorox Company is an investment opportunity that they would want to look into if they are trying to lower their overall beta of their portfolio. With a Value Line beta rating of .60, they have a lower correlation with the actual market than the average company (9, Kaplan). This goes back to this industry having a great defense because their products will almost always be needed no matter what state the economy is in.

The Clorox Company has generated some very promising financial ratios in the trailing year in comparison to the household products and explains why their stock has been performing very well. While the industry revenue year-over-year growth fell to an average of -16.69%, The Clorox Company manages to grow their year-over-year revenue by 2.81%. Also, their net income year-over-year growth grew 91.11% while the industry average grew 3.81% only (3, CSI

Market Editors). That is quite staggering and very telling as to where the company stands currently.

A threat moving forward for The Clorox Company is the slowing international market. This is causing them to alert investors there may be cause for concern. The company expects currency impacts to affect future sales growth enough for them to fluctuate between zero and one percent in the near future (14, Minaya). Shares continue to rise among these ushering’s due to the company beating analyst estimates on their profit. Will they continue to beat estimates including their own about future international growth moving forward? It will be interesting to see.

The Clorox Company’s annual report located conveniently on their website is very telling as to the distribution of sales and overall profitability of the company. As mentioned before, cleaning, household, international, and lifestyle are the segments that The Clorox Company breaks their products up into. Cleaning, which includes Pine-Sol and CLOROX Bleach among others accounts for 32% of sales. Household, including GLAD, KINGSFORD, and Fresh Step also accounts for 32% of sales. Hidden Valley, Masterpiece, Brita, and BURT’S BEES are all included in the Lifestyle segment which accounts for 17% of sales. 19% of sales come from their international segment which includes all the previously mentioned products combined but sold outside of the United States(1, NA). It is mentioned in Value Line’s research that their international market is projected to slip with the slowing of the economic growth while also citing a possible 3% currency decline (9, Kaplan). To combat this, The Clorox Company is expecting an increase in domestic growth with innovative new products.

Kimberly-Clark

The Kimberly-Clark Corporation (KMB) manufactures and distributes mainly health and hygiene products. Although they are not as diversified as The Clorox Company, they have an extensive list of products and brands including: Pullups, Kotex, Huggies, Cottonelle, Kleenex, Scott, and Poise. Headquartered in Dallas, Texas, Kimberly-Clark’s brand can be found in a substantial 175 countries. Their corporation segment structure can be broken down in to personal care, consumer tissue, and business to business (4, Kimberly-Clark editors). Throughout this analysis, topics will include much of the same as The Clorox Company analysis for some comparison. These topics will include their source of revenue, strengths, and threats.

Kimberly-Clark is mainly found in large stores like Walmart (13% of net sales), Costco, and WALGREEN CO, but Kimberly-Clark products are found as well in smaller market convenient and drug stores. Their products that are intended for away-from-home use are sold through exterior distributors and straight to lodging, office building, food service, manufacturing, and high volume public facilities. It is safe to say that their revenue stream is directly tied to the retail segment of the economy. There is a correlation between Kimberly-Clark’s sales and the overall retail market. Although, this correlation is not as significant as some other companies that offer more “want to” products rather than products that Kimberly-Clark and The Clorox Company offer that are more like “have-to” purchases. This leads to a lower beta, much like The Clorox Company, of .60 (20, Seidman). This is another investment opportunity for an investor if they are looking to lower their portfolio’s total beta.

Kimberly-Clark’s products and customers lead to a revenue stream that is consistent throughout the year and from year to year. Surprisingly Kimberly-Clark is extremely reliant on the international market as it accounts for just over 53% of their total net sales. This has a lot of positives, yet there are also some threats when it comes to investing over half of your business internationally. This creates a lot of foreign market risk including foreign exchange risk, currency restrictions and political, social and economic instability. Movement of a variety of currencies against each other and the U.S. dollar creates a lot of risk and is really very difficult to predict. In the Kimberly-Clark annual report that they increases in currency exchange restrictions have limited their ability to repatriate international earnings. Although this is more of a political debate, one should mention that the less cash flow they repatriate the larger those international operations are going to become. This creates more and more dependency on the international market. Examining Kimberly-Clark’s and The Clorox Company’s annual report, it is easy to see that Kimberly-Clark lays out a substantial more amount of risks and threats they are going to have to combat in the coming years (16, Serena). Either Kimberly-Clark is much more diligent and worrisome or The Clorox Company really does not have nearly as many threats. This may be. Generally the international market has been more risky in the past than the U.S. market (17, Serena). Having a large amount of holdings in the international market creates more possibilities for risk and ultimately makes their corporation riskier.

It is important to not only look at where Kimberly-Clark conducts business but also to how Kimberly-Clark generates revenue in terms of their interior segments. As mentioned earlier, their corporation can be broken into three segments including Personal Care, Consumer Tissue, and Business-to-Business (11, Progressive Digital Media). This structure is one of their strengths as they are well distributed between these three segments. The largest of the three segments is Personal Care which operates at 49.35% of their current revenue. Products included in this segment include all of their diapers, baby wipes, and feminine care products. This segment hedges a lot of market risk as they are all products that will be needed whether the economy is operating properly or not. At 33.65% Consumer Tissue is the second largest segment and includes facial and bathroom tissue, paper towels, and napkins. Lastly, their Business-to-Business segment, or “K-C Professional,” accounts for 17% of Kimberly-Clark’s revenue. As quoted on their annual report, “K-C Professional helps transform workplaces for employees and patrons, making them healthier, safer and more productive, through a range of solutions and supporting products such as apparel, wipers, soaps, sanitizers, tissue and towels (4, Kimberly Clark editors). That completes their business structure and revenue stream which shows that a lot of their products are relatively inelastic.

As mentioned earlier with The Clorox Company, there are a few growth ratios that can be telling as to where a company currently stands. Unfortunately, Kimberly-Clark’s growth numbers are not nearly as progressive as Clorox’s were. Their year-over-year operating income change was -13.3% compared to Clorox’s of 2.81%. Kimberly-Clark’s year-over-year net income growth was at -9.11% as well in comparison to the substantial amount of 91.11% that Clorox was able to manage. Kimberly-Clark definitely has some obstacles to maneuver around in the near future (10, CSI Market editors).

Although their products are mainly inelastic, Kimberly-Clark has created more risk than The Clorox Company with international systematic risk. Currency risk will be one of their biggest issues to tackle in the future and is going to require their undivided attention (6, Dulaney). Although their beta and The Clorox Company’s beta are very similar, there is more cause for concern with Kimberly-Clark going forward with a slowing international economy. Both investment opportunities allow for consistent and more predictable growth than the average company. This gives investors with low risk tolerance an opportunity to invest with them.

Exhibit Analysis

Exhibit 1

The DJIA (Dow Jones Industrial Average), SP500, and NASDAQ all have very different portfolio constructions. Although they may have some of the same holdings as the others, they mainly differ in the amount, style, and size of stocks. Starting with DJIA usually associated as the overall market indicator, where their holdings include only 30 stocks. These 30 stocks are among the largest and most heavily traded companies in the United States. In all reality, the DJIA is not a great indicator of the total market but really a better indicator of how big corporations or “blue chip” stocks are doing. The NASDAQ composite index includes all companies on the Nasdaq Stock Market which totals out to be more than 3000. With 3000 stocks, the NASDAQ is a much more broad representation, but the NASDAQ has a high concentration of technology stocks which makes the index more sensitive to the technology industry than other sectors. When we look at the SP500, it is really the best individual gauge of the condition of U.S. markets. The SP500 includes mainly 500 companies from all sectors of the economy. It is a much more diversified portfolio than the Dow simply because of the amount of

stocks. These indexes usually model each other closely, but they do have different outcomes because of the amount, classification, and size of the stocks they hold in their portfolios. (13, Merrit)

Exhibit 2

By a very small margin, The Clorox Company (CLX) outperforms Kimberly-Clark (KMB). In the grand scheme of things, $388.82 compared to 382.31 is very similar. Although The Clorox Company outperformed, both stocks had great returns for this time period of 13 years where they both demolished General Electric and the SP500. Over the last decade, GE has been an underperformer in comparison with industry competitors like Honeywell and United Technologies. A lot of this under performance has been attributed to their financial arm which they just recently got rid of. Performance of Kimberly-Clark and The Clorox Company are modeled as “slow and steady” because of the nature of their business. Both with household items that are needed on a daily basis, they are less effected by the overall economy and market. Notice if you follow the two companies, they do mirror the SP500, but in 2008 when the market collapsed, Kimberly-Clark and The Clorox Company did not take as much of a hit as the SP500 and General Electric. Even during the growth period after the collapse, Kimberly-Clark and The Clorox Company have had a larger increasing average slope than the SP500. To an income investor, these two stocks are very lucrative.

Exhibit 3

In all reality, when we look at exhibit 3 all of the funds mirrored the SP500 index almost perfectly. Although, they all did outperform the SP500 because of dividends distributed. All three funds chosen are stock funds with all having over 95% U.S. stocks in their portfolio. With large diversification in each of their portfolio’s they managed to keep their beta within 8 basis points of the SP500 1.0 beta while, of course, the VFINX fund had a beta of 1.0 as well because of it being an SP500 fund.

Exhibit 4

EXHIBIT 4 - RISK AND RETRUN STATISTICS FOR THE MARKET INDEXES, INDIVIDUAL STOCKS, AND MUTUAL FUNDS:

SP500 DJIA NASDAQ GE KMB CLX VFINX PINVX CENSXReturnEmpirical Annualized Return 6.78 5.89 10.82 4.52 10.87 11.01 8.85 7.85 8.89

Risk MeasuresAnnualized Monthly Std. Deviation 14.05 13.29 17.33 26.41 14.35 14.77 14.07 15.19 13.73Maximum Monthly Return 10.77 9.54 12.35 25.12 14.63 11.26 10.91 12.10 13.14Minimum Monthly Return -16.94 -14.06 -17.73 -27.78 -8.47 -8.89 -16.79 -16.32 -15.50Empirical SP500 Beta 1.00 0.92 1.15 1.43 0.46 0.38 1.00 1.06 0.92

NOVEMBER 2002 - OCTOBER 2015 MONTHLY RETURNSMARKET INDEXS COMPANY STOCKS MUTUAL FUNDS

By far, GE has the highest company Beta which makes them more susceptible to change in the market. If there is a large impact in the overall market, GE’s stock will follow it closer than the other 8 in this analysis. Following along with that, GE also has the largest maximum-minimum spread where their spread equates out to 62.90 spread. The maximum monthly return was 25.12% while the lowest monthly return was -27.78%. Naturally because of this, GE also had a substantially higher annualized monthly standard deviation than the others. In terms of having a low beta, CLX and KMB really stick out. In the company/industry analysis, I will go into more detail as to why this is. Simply put, they are much more inelastic companies in comparison to the market or companies like GE. Looking into the maximum-minimum spread, The Clorox Company has the lowest spread of 20.15. Their minimum spread was -8.89% while their largest gaining month in this time period was 11.26%. When we look at lower standard deviation, six out of 9 stocks were lower than 15. These included the SP500, DJIA, KMB, CLX, VFINX, and CENSX.

Exhibit 5

EXHIBIT 5 - PERFORMANCE INDICATORS FOR THE MUTUAL FUNDS AND THE SP500 INDEX

MARKET INDEXSSP500 VFINX PINVX CENSX

ReturnEmpirical Annualized Return 6.78 8.85 7.85 8.89

Risk MeasuresAnnualized Monthly Std. Deviation 14.05 14.07 15.19 13.73Maximum Monthly Return 10.77 10.91 12.10 13.14Minimum Monthly Return -16.94 -16.79 -16.32 -15.50Empirical SP500 Beta 1.00 1.00 1.06 0.92

MORNINGSTAR'S "QUOTE""Overall Monringstar Rating" 4 Star 2 Star 4 StarLoad None 5.75 NoneTotal assets $219.7 bil $1.9 bil $223.8 milExpenses 0.17% 1.03% 1.09%Fee level Low Below Avg HighTurnover 3% 44% 126%Status Open Open OpenMin. Inv. $3,000 -- $100,000Investment Style Large Blend Large Blend Large Growth

Asset Allocation % of Net AssetsCash 0.50% 0.84% 6.40%US Stocks 98.13% 95.11% 88.97%Non US Stocks 1.38% 3.23% 4.56%Bond 0% 0% 0%Other 0% 0.82% 0%

Morningstar's 10-YEAR R&RSP500 R-Squared 100% 96.82% 90.82%SP500 Beta 1 1.06 0.94Standard Deviation 15.08 16.27 14.92

NOVEMBER 2002 - OCTOBER 2015 MONTHLY RETURNSMUTUAL FUNDS

All mutual funds that were selected have a very large stock allocation as they are all considered “stock” funds. CENSX and PINVX due have a larger holding in international stocks

while VINFX is mainly US stocks in correlation with the SP500. In terms of expenses CENSX and PINVX are substantially higher than the Vanguard 500 fund. CENSX comes in at 1.09%, PINVX totals 1.03%, and VFINX sits at .17% respectfully. Another component to notice regarding these funds is the minimum investment where PINVX does not require a minimum. On the other hand, CENSX requires a substantial $100,000. A more reasonable number comes from the Vanguard 500 number where $3000 is the minimum.

Exhibit 6

EXHIBIT 6 - CORRELATINO MATRIX OF THE NINE INVESTMENT SERIES MONTHLY RETURNS

SP500 DJIA NASDAQ GE KMB CLX VFINX PINVX CENSXSP500DJIA 0.971818

NASDAQ 0.932145 0.8754GE 0.763238 0.763247 0.657308KMB 0.452733 0.50115 0.318514 0.394459CLX 0.358653 0.38026 0.313562 0.348641 0.426004VFINX 0.999876 0.971684 0.93308 0.762337 0.452402 0.35693PINVX 0.982595 0.945963 0.931368 0.708636 0.421887 0.337977 0.982658CENSX 0.940618 0.891988 0.901861 0.670155 0.369604 0.315825 0.940368 0.937054

NOVEMBER 2002 - OCTOBER 2015 MONTHLY RETURNSMARKET INDEXS COMPANY STOCKS MUTUAL FUNDS

The highest correlation with the SP500 is of course VFINX because their portfolio virtually mimicking the SP500 index in stock selection. Clorox had the lowest correlation with the SP500 which makes sense having a lower beta as well. Ultimately, the reason for CLX having a low correlation is because their stock is one stock. It is not diversified like the SP500. Not only this, but CLX does not react to the market as most of their products are needed whether or not the economy is performing well. Their earnings and results are very consistent which leads to a stock price that has a great opportunity for consistent growth.

Exhibit 7

Kimberly-Clark and The Clorox Company have very similar risk and return statistics with Clorox being slightly more risky and yielding a minimally larger return. They both have a low beta creating an environment for them to continually prosper whether the overall market is falling or thriving. Although the CENSX and VIFNX funds are slightly less risky (14.56 average to 13.90 average) the return on KMB and CLX make that added risk much more worthy (10.95% to 8.87% average annualized returns. It is a fair assumption to make that KMB and CLX dominate the field in the risk and return aspect. There are not any other options in the nine that have greater returns. Because of this, there are not any options above and to the left of KMB and CLX.

Exhibit 8

Surprisingly, there are six stocks and/or funds that lie above the Security Market Line. Notably, the NASDAQ index, KMB, and CLX all substantially lie above the Security Market Line. The DJIA and GE both lie below the Security Market Line. The SP500 is a much more diversified holding compared to DJIA and especially GE. This can lead to more consistent returns. GE really had an underperforming decade due to some questionable ventures into industries they were not experts in.

Works Cited

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2. "Clorox Co Analyst Day - Final." Fair Disclosure Wire Oct 01 2015.

3. "THE CLOROX COMPAMY Segments." Clorox (CLX) Divisions, Quarterly Segment Results. CSI Market, Inc, 2015.

4. "Company Profile." Kimberly-Clark. KCWW, 2015.

5. Cramer, Bob. "The Household and Personal Products Industry – Dark Clouds on the Horizon." BIDNESSETC, 05 Feb. 2014.

6. Dulaney, Chelsey. "Kimberly-Clark Posts a Loss, Gives Disappointing Outlook; Currency Volatility, Increased Competition Hurt Results." Wall Street Journal (Online)

Jan 23 2015.

7. Glazer, Emily. "Boss Talk: To Clorox CEO, U.S. is Bright Spot for Growth." Wall Street Journal, Eastern edition ed.Jun 27 2012.

8. Gondo, Nancy. "Clorox, Kimberly Pay Steady Yield." Investor's Business Daily Nov 14 2014. 

9. Kaplan, Jerome H. "Clorox Co." Value Line, Inc, 25 Sept. 2015.

10. . "KIMBERLY-CLARK CORPORATION Segments." Kimberly-clark (KMB) Divisions, Quarterly Segment Results. CSI Market, Inc, 2015.

11. Kimberly-Clark Corporation : Consumer Packaged Goods - Company Profile, SWOT & Financial Report. Basingstoke: Progressive Digital Media, 2014.

12. Mann, Ted. "Corporate News: Immelt Buys $3.6 Million of GE Stock to show Faith." Wall Street Journal, Eastern edition ed.Mar 05 2014. 

13. Merrit, Cam. "What Are the Differences Between the Dow Jones, NASDAQ & S&P 500?" Zacks. Zacks Investment Research, n.d.

14. Minaya, Ezequiel. "Earnings: Clorox Cleans Up in Quarter, but Issues Downbeat Outlook." Wall Street Journal, Eastern edition ed.Aug 04 2015.

15. Ng, Serena, and Chelsey Dulaney. "Business News: P&G's Sales Shrink as it Remakes itself --- Despite Declines, Consumer-Products Giant Expects Growth in Current Quarter." WallStreet Journal, Eastern edition ed.Oct 24 2015.

16. Ng, Serena, and Chelsey Dulaney. "Business News: Kimberly-Clark Hit by Currency Impacts." Wall Street Journal, Eastern edition ed.Oct 22 2015.

17. Ng, Serena, and Chelsey Dulaney. "Kimberly-Clark Beats Expectations Despite Currency Volatility; Currency Impacts Offset Volume Growth in Personal-Care, Consumer-Tissue Segments." Wall Street Journal Oct 21 2015.

18. "P&G Agrees to Buy Gillette In a $54 Billion Stock Deal." Wall Street Journal, Eastern edition ed. 30 Jan. 2005.

19. Seidman, Orly. "Industry Analysis: Household Products." Industry Analysis: Household Products. Value Line, Inc, n.d.

20. Seidman, Orly. "Kimberly-Clark." Value Line, Inc, 25 Sept. 2015.