A Stock That Hammers Out Growth

The Arm & Hammer brand can be found in 86% of U.S. households, but I doubt that stock of its parent company Church & Dwight (NYSE: CHD  ) is propping up a comparable number of investment portfolios. That's too bad, considering that total annual shareholder return has averaged 18% over the past 10 years, including a positive showing in 2008. Lucky for us, the company's still growing, and the stock is cheap.

Church & Dwight is built for recessionary times. Its value-priced laundry detergents, oral care products (think Aim and Orajel), and household cleaners appeal to cash-strapped consumers. And even though management sees private-label competition increasing for the next year or so, that threat should be small, as private-label market share is low across their product categories. Even amid those concerns, the company recently raised its 2009 guidance to reflect organic revenue growth of 3% and earnings per share growth of 15%-17%. That easily bests Proctor & Gamble's (NYSE: PG  ) forecast of fiscal 2010 organic sales growth of 1%-3% alongside a substantial earnings decline.

Moreover, Church & Dwight management is shareholder friendly. In a welcome change from the Citigroups (NYSE: C  ) of the world, the Arm & Hammer folks don't bask in the luxury of corporate jets, company cars, or cockamamie compensation schemes. Bonuses are derived from company performance in the areas of revenue, gross margin, operating margin, and free cash flow, and management is required to invest in company stock.

Despite these strengths, Church & Dwight does suffer from weakness in its specialty products division. Revenue in this segment is split roughly 50-50 between animal nutrition and industrial chemicals. In first-quarter 2009, segment sales were down 15% versus the prior year. Part of that decline is due to foreign exchange headwinds and one-time gains in 2008, while fundamental reasons include a decline in milk prices that depressed animal nutrition volumes. In this sense, Church & Dwight is suffering from the broad agriculture slump that has also been a growth killer for fertilizer names PotashCorp (NYSE: POT  ) , Mosaic (NYSE: MOS  ) , and Agrium (NYSE: AGU  ) . Fortunately, the specialty products division accounts for only 10% of net sales.

I believe investors can rest assured that any nicks in the company's armor will be offset by ample forward momentum. Free cash flow hit a record $289 million in 2008, and management has delivered on its commitment to steadily expand margins. Additional efficiencies are expected from a new laundry manufacturing and distribution facility that is slated to open at the end of the year. Growth initiatives in its Trojan condom business include a discrete two-condom "go pack" and a new comfort-shape condom called Trojan Ecstasy.

Eight brands are responsible for over 80% of Church & Dwight's revenue and profit. On the chance that one of those names falls out of favor with consumers, it would likely mean a big hit to the bottom line. Stranger things have happened, but I don't see that as a credible threat. For example, the Arm & Hammer brand rocketed from 1% annual growth in 2004 to 11.3% growth in 2008 -- and that span encompasses both the credit-drunk consumer of yore and the breadline fearful of today.

With a consistent track record of delivering earnings and cash flow growth, and trading at a 2009 P/E of roughly 16 against earnings growth expectations of 15%-17%, I'd say that is one of the best buys in the consumer staples sector. Its five-year forward annual growth looks several percentage points better than similarly valued Colgate (NYSE: CL  ) . Heck, if you account for the low downside risk, I'd say Church & Dwight is one of the best investment opportunities that the market currently offers, period.

Other ways to grow your portfolio through a recession:

Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services, free for 30 days.

Fool contributor Mike Pienciak does not hold shares in any company mentioned. The Fool has a disclosure policy.


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