Your Ticket to Steadily Rising Profits

For Church & Dwight (NYSE: CHD  ) , it's all upside.

OK, maybe not all, but darn close. This lesser-known consumer-staples company posted fourth-quarter 2009 sales of $670.8 million, representing 4% year-over-year growth. Reported earnings per share gained 19% for the quarter, to $0.74. When we exclude restructuring charges, EPS growth advances to 26%, ahead of analyst expectations.

I've noted in the past that this everyday-products company offers growth-stock traits, and these latest results once again bear out that claim.

For the full year, the maker of Arm & Hammer, SpinBrush, and Trojan brand products grew revenue by 4.1%, to $2.52 billion. At $3.41, EPS rose 23%.

The good news just doesn't stop. Free cash flow increased a healthy 12%, to $266 million. For a bit of perspective, free cash flow -- excluding special items -- has well exceeded net income during each of the past three years. That's no lucky feat: One-fourth of management's incentive compensation is levered to FCF targets.

Such financial discipline has paid off. Church & Dwight is currently sitting on $450 million in cash, while total debt registers a mere 1.6 times EBITDA. The upshot? Management is patrolling the industry for potential acquisitions. However, this has been the case for some time now, and given the company's strict acquisition guidelines -- No. 1 or No. 2 brands coupled with asset-light businesses -- it could still be a while before anything materializes.

But that's no real loss. Church & Dwight's existing product portfolio has plenty of runway. For instance, in 2009, seven of the company's eight "power brands" surpassed category sales growth. Meanwhile, Arm & Hammer is on track to become the company's first billion-dollar brand. And did I mention that the company bagged 90% of the growth in the branded "value" segment during the past year? When customers moved to value products, they converted overwhelmingly to Church & Dwight.

A few key points, however, do temper the company's outlook. Management expects 2010 to be even tougher than 2009, marked by continued promotional activity among competitors and rising commodity costs. While companies such as Clorox (NYSE: CLX  ) expect product discounting to ease in the latter part of the year, I've yet to encounter a consumer-staples name that isn't girding for higher input costs.  

Also, Church & Dwight is forecasting 2010 EPS of $3.93-$4.00, representing growth of 13%-15%. Unfortunately, that's below the high-teens growth of recent years. Nonetheless, it is at the very least even with competitor Colgate-Palmolive's (NYSE: CL  ) historic growth, and it beats the pants off the EPS decline that Procter & Gamble (NYSE: PG  ) is expecting during its current fiscal year.

Moreover, applying a modest P/E-to-growth premium of 17.5 to Church & Dwight's $4.00 EPS estimate gets us a $70 stock. So with shares trading in the neighborhood of $63, there's still upside potential.

Unlike other "boring" companies such as SYSCO (NYSE: SYY  ) , Automatic Data Processing (Nasdaq: ADP  ) , and FPL Group (NYSE: FPL  ) , I believe it'll be a long time before Church & Dwight offers investors substantial dividend income. But depending on your portfolio's needs, its steady, above-par growth is ample compensation.

Further Foolishness flexes its muscle:

SYSCO is a Motley Fool Inside Value recommendation. Automatic Data Processing, Clorox, Procter & Gamble, and SYSCO are Income Investor recommendations. The Fool owns shares of FPL Group, Procter & Gamble, and SYSCO. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak owns shares of Church & Dwight but holds no financial interest in any other company mentioned in this article. The Fool has a disclosure policy.


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