Church & Dwight: Is the Valuation Justified?

The company has performed well on rising consumer demand for personal care and hygiene products

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Ishan Majumdar
Apr 15, 2021
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Church & Dwight (

CHD, Financial) has weathered the pandemic well and continues to maintain its strong market position by delivering back-to-back good results. The company witnessed increased demand for its personal care and hygiene products and was also able to capitalize on the demand for at-home spa products growth through its Flawless acquisition.

E-commerce continues to be an important and fast-growing channel for the company's top-line growth, as is the case for most consumer goods players these days. I think many investors would be attracted to the stock given all these factors as well as the company's strong brand portfolio, but is the company's valuation right now a a good entry point, or should investors wait for a pullback?

Recent financial performance

Every single one of Church & Dwight's 2020 quarters was an all-around beat. Even in its most recent Q4 2020 result, the company reported a top-line of $1.30 billion, which implied a 13.21% growth as compared to the $1.14 billion in revenue reported in the corresponding quarter of the previous year. Its revenue performance was well above the analyst consensus estimate of $1.26 billion.

Church & Dwight's fourth-quarter revenues translated into a gross margin of 43.03% and an operating margin of 13.02%, which are both reasonably high for companies within the consumer goods domain.

Its net income of $150.20 million resulted in adjusted earnings per share (EPS) of 53 cents, which outperformed the average Wall Street expectation by 1 cent.

The company generated $192.1 million in the form of operating cash flows, which was also decent. One of the largest factors for Church & Dwight's strong 2020 performance was its brands within the personal care and hygiene space.

Hygiene and personal care products

While Covid-19 has brought downturns in many portions of the economy, a number of cleaning product companies like Church & Dwight stayed on the bright side. The company has been gaining from rising consumer demand for household and personal care products driven by customers' increased preference for maintaining good hygiene.

The company witnessed double-digit growth in several domestic categories, particularly gummy vitamins, baking soda and pregnancy test kits. It is worth mentioning that the management adapted quickly to the changing trends in the women's grooming space because of spa closures. They launched a series of spa-at-home products associated with its well-known brand Flawless, which gathered momentum in the past few months.

Some of its other new launches include products under the OxiClean Laundry, Home Sanitizer, Waterpik Sonic-Fusion 2.0 (power flosser) and other brands.

Church & Dwight's e-commerce sales have seen a strong momentum backed by accelerated online shopping preferences, surging by almost 60% in 2020. All these factors were responsible for the string of good results in 2020.

Acquisition-led growth

Church & Dwight has a long history of acquisitions that have been contributing significantly toward the top-line growth of the company. In December 2020, the management went on to acquire Matrixx Initiatives for $530 million. Matrixx owns the Zicam brand, which is a leading zinc supplement in the vitamins, minerals and supplements (VMS) cough/cold shortening category. This represents a solid addition to the existing portfolio of the company's brands and enables Church & Dwight to leverage its distribution network in order to generate the anticipated annual cost savings of approximately $5 million by 2022. This buyout is likely to boost Church & Dwight's cash earnings by nearly 3% in 2021.

Apart from this, the acquisition of Flawless has been extremely synergistic for the company, the sales of which contributed to the company's consumer international segment results in the recent quarters. The introduction of new products, a strong boost from marketing influencers and the recent revival of footfalls have all been important factors keeping the company rock-solid in the course of the pandemic.

Valuation

In the above chart, we see a comparative analysis of the enterprise-value-to-revenue multiple of three large-caps who have all benefitted from the big boost in the at-home consumption of personal care and hygiene products Church & Dwight, Kimberley-Clark (

KMB, Financial) and Clorox (CLX, Financial). Each of these companies has witnessed strong tailwinds, has a strong brand portfolio in this domain and all of them have witnessed strong online sales.

However, we see Church & Dwight trading at a significantly higher multiple as compared to its peers. While this could imply that the market is perceiving Church & Dwight to have a better growth potential than the others, it also leaves less room for stock price upside. All of Church & Dwight's valuation multiples are well above the median in the consumer packaged goods space.

This makes me believe that most of the future growth drivers have already been factored into the current market price, and I think there is very little scope for multiples expansion for this stock. I believe that despite investors holding this stock should tread with caution and keep a close eye on the corporate announcements and the results in the future.

Disclosure: No positions.

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I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies. I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.