Church & Dwight & Co., Inc., develops, manufactures and markets a range of household, personal care and specialty products. Its brands include ARM & HAMMER, (used in multiple product categories such as baking soda, carpet deodorization and laundry detergent), TROJAN Condoms, XTRA laundry detergent, OXICLEAN pre-wash laundry additive, NAIR depilatories, FIRST RESPONSE home pregnancy and ovulation test kits, ORAJEL oral analgesics and SPINBRUSH battery-operated toothbrushes. The Company operates in three business segments: Consumer Domestic, Consumer International and Specialty Products. During the year ended December 31, 2009, Consumer Domestic, Consumer International and Specialty Products segments represented approximately 74%, 16% and 10%, respectively, of the Company’s net sales.
Company Name: Church & Dwight, Inc
Ticker: CHD
Market Cap: $5.2 billion
Business Predictability: 5 STARS
Industry: Cleaning Products
Analysis:
Boring is good. While the household product category may be as boring as watching grass grow – it’s very profitable. The personal care products industry is driven by scale and brand power. Church & Dwight benefits from both as it has a very power brand portfolio. A company this size will depend on organic and acquired growth. Church & Dwight's organic growth should be driven by new product introductions in power brands and distribution penetration as well. Greater exposure to slow growth categories, legacy value products, and U.S. market should limit organic sales growth going forward. However, ongoing operating margin leverage and expansion should support solid organic earnings growth. Valuation will be impacted by limited top-line growth, near-term risks from input costs, and increased competition for acquisitions.
Given the very stable nature of its business and strong brand portfolio, the company’s cash flow is outstanding. The strong free cash generation will permit further acquisitions and potential dividend increases which will result in strong shareholder returns.
Valuation:
Ratios –
P/E (ttm) 19.5X
P/S 2.0X
P/B 2.8X
EV/EBIT 12.7X
Discounted Cash Flow Analysis –
The market is currently discounting above average growth for the company. Therefore, the embedded margin of safety is dependent upon future growth. It is reasonable for a company such as CHD to post continued growth, but any disruption to this assumption will result in margin compression.
Current Developments:
Church & Dwight Reports 2010 Results
February 8, 2011 7:30 AM ET
Church & Dwight Co., Inc. today announced that full year 2010 reported earnings per share increased 10% to $3.75 per share compared to $3.41 per share in the prior year. Full year 2010 earnings per share include a $0.21 charge for the settlement of the Company’s US pension benefit obligation. Adjusted earnings per share increased 14% in 2010. Adjusted earnings per share excludes the 2010 pension settlement and the 2009 plant restructuring charges of $0.24 per share and favorable legal settlement of $0.17 per share. Gross margin fell 90 bps short of our forecast. Lower tax rate added $0.03. Organic sales were down for the Specialty Products business.
Estimates updated based on recent quarterly earnings announcement.Positive impacts from (1) updated sales growth and foreign exchange and lower expected core SG&A expenses were offset by lower expected gross margin and a higher expected tax rate. Forecasted 2011 EPS estimates of $4.40/$4.80 are based upon 3.5% / 4.0% organic revenue growth coupled with 80bps/90bps incremental gross margin improvement. EPS guidance may prove conservative given management's track record of margin expansion plus potential accretive acquisitions.
Potential Catalysts:
- 2011 new product announcements.
- CHD Consumer International division was better than anticipated.
- Acquisitions to fill in the brand portfolio.
Risk:
- Rising material input costs.
- Competition for profitable acquisition candidates.
- Weak consumer demand.
- Premium valuation.
Conclusion:
Church & Dwight trades at a premium in terms of valuation – and deservedly so. The stock has had a magnificent run for the past 30 years! While this wouldn’t necessarily be in the category of a home run investment, it should continue to post solid returns for shareholders including dividends.
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
Company Name: Church & Dwight, Inc
Ticker: CHD
Market Cap: $5.2 billion
Business Predictability: 5 STARS
Industry: Cleaning Products
Analysis:
Boring is good. While the household product category may be as boring as watching grass grow – it’s very profitable. The personal care products industry is driven by scale and brand power. Church & Dwight benefits from both as it has a very power brand portfolio. A company this size will depend on organic and acquired growth. Church & Dwight's organic growth should be driven by new product introductions in power brands and distribution penetration as well. Greater exposure to slow growth categories, legacy value products, and U.S. market should limit organic sales growth going forward. However, ongoing operating margin leverage and expansion should support solid organic earnings growth. Valuation will be impacted by limited top-line growth, near-term risks from input costs, and increased competition for acquisitions.
Given the very stable nature of its business and strong brand portfolio, the company’s cash flow is outstanding. The strong free cash generation will permit further acquisitions and potential dividend increases which will result in strong shareholder returns.
Valuation:
Ratios –
P/E (ttm) 19.5X
P/S 2.0X
P/B 2.8X
EV/EBIT 12.7X
Discounted Cash Flow Analysis –
The market is currently discounting above average growth for the company. Therefore, the embedded margin of safety is dependent upon future growth. It is reasonable for a company such as CHD to post continued growth, but any disruption to this assumption will result in margin compression.
| Margin of Safety | |
| 10% | 11% |
| 10-15% | 19% |
| 15% | 27% |
| Book Value / Share | Return on Equity | Return on Assets | |
| Dec-10 | $26.30 | 14.5 | 9.2 |
| Dec-09 | $22.70 | 15.2 | 7.8 |
| Dec-08 | $19.00 | 14.7 | 7 |
| Dec-07 | $16.31 | 15.6 | 6.7 |
| Dec-06 | $13.22 | 16.1 | 6 |
| Dec-05 | $10.82 | 17.6 | 6.3 |
| Dec-04 | $8.86 | 15.9 | 4.7 |
| Dec-03 | $7.17 | 18.5 | 7.2 |
| Dec-02 | $5.81 | 19.2 | 6.7 |
| Dec-01 | $4.81 | 16.6 |
Current Developments:
Church & Dwight Reports 2010 Results
February 8, 2011 7:30 AM ET
Church & Dwight Co., Inc. today announced that full year 2010 reported earnings per share increased 10% to $3.75 per share compared to $3.41 per share in the prior year. Full year 2010 earnings per share include a $0.21 charge for the settlement of the Company’s US pension benefit obligation. Adjusted earnings per share increased 14% in 2010. Adjusted earnings per share excludes the 2010 pension settlement and the 2009 plant restructuring charges of $0.24 per share and favorable legal settlement of $0.17 per share. Gross margin fell 90 bps short of our forecast. Lower tax rate added $0.03. Organic sales were down for the Specialty Products business.
Estimates updated based on recent quarterly earnings announcement.Positive impacts from (1) updated sales growth and foreign exchange and lower expected core SG&A expenses were offset by lower expected gross margin and a higher expected tax rate. Forecasted 2011 EPS estimates of $4.40/$4.80 are based upon 3.5% / 4.0% organic revenue growth coupled with 80bps/90bps incremental gross margin improvement. EPS guidance may prove conservative given management's track record of margin expansion plus potential accretive acquisitions.
Potential Catalysts:
- 2011 new product announcements.
- CHD Consumer International division was better than anticipated.
- Acquisitions to fill in the brand portfolio.
Risk:
- Rising material input costs.
- Competition for profitable acquisition candidates.
- Weak consumer demand.
- Premium valuation.
Conclusion:
Church & Dwight trades at a premium in terms of valuation – and deservedly so. The stock has had a magnificent run for the past 30 years! While this wouldn’t necessarily be in the category of a home run investment, it should continue to post solid returns for shareholders including dividends.
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
