Church & Dwight Co $CHD is a great stock to do some equity research analysis on because the co is largely recession resistant, trades on a good evaluation and offers the prospect of some upside from a fall in commodity input costs.
Church & Dwight are in the personal and homecare space and, are a small cap company which is comparable to the like is Reckitt Benckiser, Colgate, Clorox, Unilever etc. The company is little discussed but has an excellent track record of generating earnings through the cycle. This analysis seems them being able to generate at least double digit returns for a stock investor from here.
Church & Dwight Brands
The brands can be categorized as a diversified collection of personal and homecare goods. Much of their brands are value propositions which offer upside in a stagnant economy as consumers trade down to cheaper brands. In terms of profits and sales, 80% of them come from their eight leading ‘power’ brands…
- Arm & Hammer (toothpaste, baking soda, detergent, cat litter)
- Trojan Condoms and Vibrators
- OxiClean Laundry Additive
- Spinbrush
Battery Powered Toothbrush - First Response Pregnancy Kit
- Nair Hair Removal
- Orajel Pain Relief
- Xtra Extreme Value Laundry Detergent
…which reads like a roll call of US
Church & Dwight Earnings
The management has demonstrated a tremendous ability to grow earnings and revenues over the years and this can easily be summarized below…
(m) | 2006 | 2007 | 2008 | 2009 | 2010 | 2011E |
Revenue | 1,955 | 2,221 | 2,422 | 2,520 | 2,589 | 2,710 |
Gross Profit | 761 | 877 | 972 | 1,101 | 1,157 | 1,205 |
EPS | 1.04 | 1.23 | 1.43 | 1.74 | 1.98 | 2.18 |
EPS Growth | 18.3% | 16.3% | 21.6% | 13.8% | 10.1% |
Analyst estimates for 2012 are for a further 4% revenue growth and 10% EPS growth.
All of which paints a picture of a recession proof company but 2011 has proved challenging as end demand was lower than initially expected and rising commodity costs put pressure on margin expansion. No matter, the outlook for 2012 presents upside potential as the US
It is also worth noting that gross margins jumped in 2009 with the fall in commodity prices and, Church & Dwight has managed to hold onto them despite rising costs in 10-11. Similarly, with such a well run business, working capital management is excellent and the co generated large amounts of free cash flow.
Church & Dwight Evaluation
The stock trades at a price of $44.51 with a market cap of $6.37bn. There is $275m in cash on the balance sheet with $250m in outstanding debt. FCF has grown from $200m to $364m from 2007-2010 at a CAGR of 22% with trailing FCF currently running at $391m.
Obviously, a PE ratio of 20.4x for 2011 makes little sense and even in further ahead where analysts see EPS of $2.19, the PE ratio only drops to 18.5x in 2012. However, the true value in an investment lies in its ability to generate cash and on a current FCF/EV of 391/6350= 6.2% the stock is attractive.
For a relatively secure double digit growth over the next couple of years, this stock could trade on an evaluation closer to $50 with upside potential from reducing commodity costs. A decent 12% upside.
