Church & Dwight Co. Inc. (CHD, Financial) offers an interesting array of products. Church & Dwight is the world’s largest producer of sodium bicarbonate. Consumer products include ARM & HAMMER baking soda, laundry detergent, carpet and room deodorizer, toothpaste, deodorant and Brillo. The company offers a wide array of recognizable brands:
Source: Company web-site www.churchdwight.com
While the company has a long track record of earnings growth and pays a decent 1.45% yield dividend, at current levels shares are simply too expensive for new money or even adding to a current position. Here’s why:
Reason No. 1: The current PE is well above Church & Dwight’s own normal valuations
A look at the company’s own history offers helpful clues for the future. The current price-earnings ratio is well above the company’s own normalized PE ratio. To gain some clarity, let’s first look at the period from 2010 to today. Over that period the average PE ratio for Church & Dwight has been 22X earnings. This average is represented by the blue line in the graph below. Now notice the market price (black line) relative to the historical PE. The graph below clearly demonstrates the current 28.8X PE ratio is richly valued relative to the company’s own history.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
To gain an even longer-term perspective, now let’s look at the company’s own history over the past 20 years. Once again an appreciation of history (demonstrated by the graph below) gives us solid data to consider for the future. Have a look at the period from 1997 to 2014. The market price (black line) generally trended around a “fair valuation line” and the normalized multiple (orange and blue lines). Then notice the price expansion relative to earnings during the past year or so. This becomes evident when one reviews the black market price line relative to normal PE multiples.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Yes, the company has delivered impressive earnings growth over that long-term period. But why pay such a premium as represented in the current stock price and PE ratio when over time the market tends to move back to average PE valuations? To enter at historically high levels seems to suggest more chance of downside, not upside.
Reason No. 2: There have been better entry points for patient investors
With an average of 22X earnings over the past decade, shares of Church & Dwight are never really cheap. But there have been opportunities for better entry points.
Keep in mind that today the PE ratio is 28.8X earnings. A review of the data showed that there were entry points for this quality company each year over the past five years at multiples between 18X and 23X earnings. For an investor willing to patiently wait for opportunity, why buy high?
Reason No. 3: Even with aggressive company initiatives, the price is ahead of the valuation
Church & Dwight bulls could certainly point to the solid market price growth this past year as shares have risen from a low point of $78 per share to a high of $107 per share. The company continues to be aggressive with acquisitions and other market share growth strategies, and there are those iconic brands that are powerful in the marketplace. All true and support the bull case.
Yet even with all of those activities, consensus estimates for earnings still center around about $3.81 for 2017. While this represents estimated earnings growth year over year from 2016 to 2017, this is an example of a high-quality company where the price has gotten ahead of the value and the price-to-valuation relationship is not favorable at these levels.
So what is Church & Dwight worth right now?
Assume an average PE of 22X. At current 2016 EPS estimates it wouldn't be outrageous to see shares sell-off to a more normal valuation level around $80. Even assuming all goes well into 2017, the same normalized PE suggests a reasonable valuation around $83. Interestingly, Standard & Poor’s rates Church & Dwight a “Buy” with a 12-month price target of $108. However, they themselves suggest, using their proprietary valuation model, that Church & Dwight shares have a “fair value” of $78. At current levels, this suggests the market price may be 20% overvalued.
Conclusion
Quality company, yes. But history suggests that even a bit of bad news or some other event might send the shares to more normalized PE levels and a better entry point to own this fine company. Seems now is a better time to wait and actively watch -- those who pay attention to valuation will likely have a better upside chance in the future.
Disclosure: I currently hold no position in Church & Dwight, but positions can change at any time.
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