Is Church & Dwight Destined for Greatness?

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 (NYSE: CHD  ) 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 Chart

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 Chart

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.

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