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Consumer-staples stalwart Church & Dwight (NYSE: CHD ) started the year off with a bang. However, a fiscal calendar mismatch artificially boosted year-over year comparisons, making it tough to get a read on true results.
For the first quarter, sales rose 9.2%, to $634.6 million. Stripping out the impact of currency movements and divestitures, the top line still rose nearly 8%.
Profit was another story altogether. Earnings for the maker of Arm & Hammer and Trojan brands were $1.11, beating analyst estimates by $0.03. Excluding a restructuring charge in Q1 of 2009, that figure represents 21% year-over-year growth. Besides higher sales, bottom-line growth was driven by cost reductions, efficiency gains from the company's new laundry manufacturing plant, and a favorable mix of products.
Also -- and this is something I really enjoyed seeing after certain 2009 results -- marketing expenses as a percentage of net sales was down slightly year over year, even though such costs increased on a dollar basis. Said differently, the increased spending, instead of amounting to market-share defense at the expense of margins, is doing exactly what it's supposed to -- paying off at the bottom line.
Yet as I mentioned earlier, other than improved gross and operating margins, it's hard to assess quarterly results. The company's U.S. businesses, which represent roughly 84% of total sales, benefitted from six extra selling days compared with Q1 2009. That's no small matter, and I'm disappointed that management didn’t disclose at least a rough estimate of results sans the six-day boost.
Tsk, tsk, Church & Dwight.
Ultimately, though, I'd be willing to bet that like-for-like U.S. sales did no worse than a 4% to 5% gain. And that's fine by me.
Still, investors might have other questions. Operating cash flow was down to $72 million from $92 million in the year-ago quarter. The change was due mainly to a build in inventory and accounts receivable, which in turn related to new product launches. Now, we saw a similar phenomenon in Clorox's recent quarter (NYSE: CLX ) , which supports the assumption that this is a one-time event more than anything else.
And, hey, there are more important things to focus on. Shareholders have long awaited news of another brand acquisition, and we finally got it. During the current quarter, management signed an agreement to purchase the No. 1 nasal saline solution brand Simply Saline. Annual brand sales are about $20 million, and Church & Dwight sees the acquisition adding to EPS in 2011.
Going forward, management pegs full-year organic sales growth at 4% to 5%. That's a bit better than what Procter & Gamble (NYSE: PG ) is forecasting for its fiscal 2010 year; higher than Kimberly-Clark's (NYSE: KMB ) 2010 estimate; and in line with Unilever's (NYSE: UL ) most recent quarterly performance.
The disappointment, however, was that Church & Dwight forecast current-quarter EPS growth at 8% to 10%, below analyst expectations. Despite management reaffirming its full-year EPS target, which is earnings growth in the mid teens, the market found ample reason to part with shares.
But for us levelheaded investors, the selloff could present a buying opportunity. Assuming that Church & Dwight can grow 2011 EPS at 14% versus the midpoint of current-year guidance -- which admittedly assumes that commodities don't skyrocket and competitive activities remain reasonable -- I put shares between $73 and $94 next year.
That wide range uses a price-to-earnings ratio as high as 21 and as low as 16.2 -- both within historical parameters. Should shares slip into the low $60s, the risk-reward relationship becomes a no-brainer.
Fools, prepare your shopping baskets.