Once again, Church & Dwight
The owner of the Arm & Hammer, Orange Glo, and Trojan brands, among other products, posted third-quarter sales of $646.2 million, representing a 2.5% gain from the year-ago period. Excluding currency movements and acquisitions/divestitures, sales rose 5.7%. Both metrics show growth from the prior quarter.
Year over year, reported earnings per share swelled from $0.69 to $0.98. The recent results, however, are artificially bloated from a beneficial legal settlement that contributed $0.17 per share.
That's not to say that Church & Dwight's underlying profit performance was drab. Stripping out one-time items in both quarters, EPS growth clocked in at nearly 18%. That bottom-line strength beat analyst expectations, exceeded the recent EPS gain posted by competitor Colgate-Palmolive
Church & Dwight's U.S. consumer segment, which includes laundry products under the OxiClean and Arm & Hammer names, was the standout performer. Sales increased 8.3%, helping to offset a currency-driven 7.6% sales decline in the company's much smaller international unit.
The Specialty Products segment was also weak. The culprit here was depressed U.S. milk prices, which drove down volumes in the company's dairy-cow feed and nutrition business. However, milk prices have recently shown signs of a bounce on lower supply, and prices should eventually stabilize at higher levels. At that point, Church & Dwight will likely be back on top, while dairy-intensive businesses such as Starbucks
Other noteworthy items from the quarter include a gross-margin gain north of 4%, owing to lower commodity costs, higher prices, and efficiency programs. Annoyingly, management didn’t release volume data, but it did note that seven of the company's eight "power brands" -- responsible for roughly 80% of net revenue -- enjoyed sales and market share growth. That's up from six out of eight in the prior quarter.
Ad spending again increased as a percentage of sales. Frankly, it's just too soon to know whether we should view this development as long-term brand building or fruitless expenditure. For now, I'm inclined to cut management some slack, given that operating margin widened on the whole.
Finally, net debt was down and free cash flow was up, both by impressive amounts. As I previously speculated, the significantly strengthened balance sheet has the company hunting for attractive acquisitions.
Management nudged up full-year EPS guidance from a range of $3.35-$3.40 to $3.40-$3.43, excluding restructuring charges. That represents roughly 19% year-over-year growth on a current-year P/E of 16.8 -- a good buy in my book.
Interested investors could try to nab shares in the neighborhood of $55 -- a level Church & Dwight has touched more than once in past months. But even at $57-ish, I wouldn’t be reluctant to wheel out the shopping cart.
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