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What You Should Know About Church & Dwight's Mixed Earnings Report

Church & Dwight (NYSE: CHD  ) reported third-quarter results on Nov. 1 and it showed strength throughout all business segments. Its stock barely moved in the next trading session and actually closed down 0.18%. Let's dig deeper and see if we should buy now or if something in the report points to further downside for the rest of fiscal 2013.

The baking soda giant
Church & Dwight manufactures and markets personal care, household, and specialty products worldwide. Its brands include Arm & Hammer, Trojan, First Response, Nair, Oxi Clean, and Orajel. It is the leading producer of baking soda in the United States, which is sold in retail packaging and also paired with other specialty chemicals for industrial, institutional, medical, and food applications.

Source: Church & Dwight. 

The results
Here's an overview of the key statistics from Church & Dwight's third-quarter report:

Metric Reported Expected
Earnings Per Share $0.76 $0.74
Revenue $804.80 million $813 million

Earnings per share grew 15.15% and revenue rose 10.98% year over year, while gross margin expanded 20 basis points to 45.4%. Impressively, this marked the fifth consecutive quarter of margin expansion, thanks to productivity programs within the company's operations and flat commodity costs. Every business segment grew by more than 2%, and personal care products led the way with 39% growth. Overall, it was an impressive quarter for Church & Dwight; top- and bottom-line growth with margin expansion is about as good as a quarterly report gets for a consumer products company of this size.

The major negative for the quarter was the company's outlook for the fourth quarter coming in below analyst estimates. Church & Dwight now expects to earn $0.65 per share in the coming quarter when analysts had wanted to hear $0.69 per share. The projected $0.65 would still represent 12.1% growth year over year, so this is a situation where investors should ignore the analysts and draw their own conclusions. I believe any decline in the stock due to this "weak" outlook is a buying opportunity. 

Competitor results: Ecolab and Stepan
Since my first article on Church & Dwight on Sept. 11, its two noted competitors have reported quarterly results. Ecolab (NYSE: ECL  ) released a mixed third quarter on Oct. 29, with earnings per share coming in at $1.04 versus estimates of $1.03 and revenue of $3.50 billion versus estimates of $3.54 billion. Earnings grew 25% and revenue rose 15% year over year, making for a solid quarter.

The company's stock jumped more than 3% to a fresh 52-week high after the report, but has since come down about 2%. I would wait for it to come down a total of 5% to 10% below its 52-week high before initiating a position, but definitely believe this company is set to run much higher through 2014 based on forward estimates.

Stepan  (NYSE: SCL  ) released third-quarter earnings on Oct. 21 and the stock has been hit hard in the days since. Earnings per share came in at $0.89 versus estimates calling for $0.93 and revenue was $475.5 million versus estimates of $467.4 million. Earnings were flat year over year at $0.89 per share and revenue rose just 8%, which did not impress analysts by any means.

The only real positive out of this report was the dividend being raised 6% to $0.68 annually, which marked the 46th consecutive year with a dividend increase. The stock has fallen more than 5.5% since the report, and there could be much more downside from here. I would stay far away from this one for the time being.

The Foolish bottom line
Church & Dwight is a great American company showing strength in all business segments year to date. It is undervalued based on forward estimates, but I would still like to see it come down 5% below its 52-week high before picking up a position. Ecolab is another great play in this industry if you are not sold on Church & Dwight, so take a look at these high-quality names and see if there's a place for one in your portfolio.

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9/29/2016 4:02 PM
CHD $47.56 Down -0.77 -1.59%
Church and Dwight CAPS Rating: ***
ECL $120.73 Down -0.57 -0.47%
Ecolab CAPS Rating: *****
SCL $72.36 Down -0.83 -1.13%
Stepan Company CAPS Rating: *****