Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Church & Dwight (CHD 0.10%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell C&D's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at C&D's key statistics:
CHD Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
16.9% |
Fail |
|
Improving profit margin |
18.5% |
Pass |
|
Free cash flow growth > Net income growth |
60% vs. 38.6% |
Pass |
|
Improving EPS |
40.2% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
99.5% vs. 40.2% |
Fail |
Source: YCharts.
*Period begins at end of Q1 2010.
CHD Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
4.3% |
Pass |
|
Declining debt to equity |
(7.9%) |
Pass |
|
Dividend growth > 25% |
300% |
Pass |
|
Free cash flow payout ratio < 50% |
33.7% |
Pass |
Source: YCharts.
*Period begins at end of Q1 2010.
How we got here and where we're going
C&D got off to a hot start, but it was tripped up primarily by merely average revenue growth. That isn't enough to call this stock stale, as C&D still earned seven out of nine possible passing grades regardless, and it has a very good chance to gain a perfect score next time around provided valuations and fundamentals come closer together. How might C&D push its revenue even higher over the next few quarters?
Over the last four years, thanks to an effective marketing campaign surrounding what are in many cases less-familiar brands (excepting Arm & Hammer), C&D's new products have contributed more than over half of its new organic revenue since 2009. Going forward, C&D will also continue to exploit its flagship Arm & Hammer brand to the fullest.
The company anticipates cash flow of $456.5 million this year, which would be good for an 11% growth rate from the trailing 12 months (but barely ahead of 2012's $449.1 million tally). As domestic household products account for the majority of revenues there's a lot of room for international growth -- overseas sales currently account for about 20% of revenues.
Last year, C&D bought Avid Health, which makes popular gummy vitamins (if anyone were to get vitamin poisoning, this would be a good excuse), for $650 million. That's a bit of a divergence for C&D, but one can certainly see the appeal in such a niche. Last quarter, Avid made up 5% of C&D's EPS. If this trend holds true, Avid's purchase P/E was somewhere around 36, since 5% of C&D's trailing 12-month earnings are in the neighborhood of $18 million. The company must be expecting big things out of little gummies. Mmm, gummies.
Putting the pieces together
Today, Church & Dwight has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
