It’s hard to find a product that is likely in every American household, but Church & Dwight Inc. (CHD, Financial) has come closer than almost anyone to ccomplishing just that. The company was founded in 1846 and is the leading U.S. producer of sodium bicarbonate (i.e. baking soda), a natural product that cleans, deodorizes, leavens and buffers. The company’s Arm & Hammer brand is one of the nation’s most iconic trademarks for a broad range of consumer and specialty products developed from the base of sodium bicarbonate and related technologies.
It operates through three segments: Consumer Domestic, Consumer International and Specialty Products. Product categories include cat litters, carpet deodorizers, laundry detergents and baking soda, as well as other baking soda based products under the Arm & Hammer brand. The company also owns the brands Trojan, Oxiclean, Nail, Orajel, Waterpik and Zicam, and it recently acquired Therabreath.
The company generated revenue of $5.1 billion in 2021 and currently has a market capitalization of $21.4 billion.
Financial review
Like many consumer product companies, in its most recent quarterly results, Church & Dwight reported mixed results with decent revenue growth but lackluster operating income and net income. Net sales grew 4.2% to $1.3 million with organic sales growing 3.4%, driven by price increases of 6.3% and volume declines of 2.9%. Operating income declined 12.4% and earnings per share was $0.76, a decline of 12.6% from the comparable quarter last year and flat versus the year-ago quarter's adjusted earnings per share.
Management stated:
"We now expect $135 million of incremental cost inflation in 2022 which is $50 million higher than our expectations in April. These incremental costs are primarily related to raw and packaging materials and the pass through of similar costs from third party manufacturers. We remain committed to offsetting inflation with price, laundry concentration, and productivity efforts. We continue to anticipate full year reported gross margin to be down versus 2021, as we expect inflation to outpace pricing and productivity. Marketing spend is now expected to be lower in 2022 driven by the lower spend in the first half of the year that was driven by lower fill levels. In the second half, marketing dollar spend is expected to be significantly higher than the first half.”
Valuation
The company stated that they expect earnings per share for 2022 to be flat with the prior year. Consensus analyst estimates for earnings per share are $3.11 for 2022 and $3.40 for next year. The current year price-earnings ratio is approximately 28, which seems excessive. However, Church & Dwight has typically traded at high multiples due to steady growth and high free cash flow generation.
The GuruFocus discounted cash flow calculator estimates a fair value of $66 when using $3.11 in earnings per share as the starting point and inputting a 10-year growth rate of 10%, which I do realize is a little on the optimistic side.
The company pays an annualized dividend of $1.05, but because of its high valuation levels, that equates to a dividend yield of only 1.09%.
Guru trades
Gurus who have purchased Church & Dwight stock recently include Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Gurus who have sold or reduced their holdings in Church & Dwight stock include Joel Greenblatt (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).
Conclusion
Despite the high valuation levels, the company appears to be able to handle a potential recessionary environment as it typically does not sell premium products and consumers tend to trade down to value products in difficult times. However, a lower valuation may be necessary to create a margin of safety.
