Church & Dwight: Will Innovative New Products Drive Earnings Much Higher?

Church & Dwight is about to release first-quarter results, so let's find out if this is a name we should buy right now.

Apr 30, 2014 at 9:30AM

Church & Dwight (NYSE:CHD), the company behind very popular brands such as Arm & Hammer, Trojan, First Response, and Oxi Clean, has watched its stock outperform the overall market in 2014 and earnings have played a key role. Another strong report could add fuel to the rally, and its first-quarter results are due out in a couple of days. Let's take a look at the most recent earnings release, expectations for the upcoming report, and take a quick look at one of its top competitors, Procter & Gamble (NYSE:PG), to determine if we should buy in right now or if we should wait to see what the quarter holds. 

Images

Source: Church & Dwight's LinkedIn

The last announcement 
On Feb. 3, Church & Dwight released its fourth-quarter report to cap off a great fiscal 2013. Here's a breakdown of the results:

MetricReportedExpected
Earnings Per Share $0.65 $0.66
Revenue $822.6 million $823.5 million

Source: Benzinga

Earnings per share increased 14% and revenue increased 1.6% year-over-year, driven by global volume growth of 5.2%. Organic sales rose 2.3% and this exceeded the company's original expectations of 1.5%-2% growth. The company's gross profit increased 3.7% to $371.7 million and the gross margin was very strong, expanding 90 basis points to 45.2%. 

Screen Shot

Source: Church & Dwight

Although the statistics listed above are impressive, the highlights of the report came when Church & Dwight made two announcements, a dividend increase and the authorization of a share repurchase program. First off, the quarterly dividend was raised by 11% to $0.31, which gives the stock a yield of roughly 1.8% at current levels. It is also worth noting that this was the 18th consecutive year with a dividend increase. Secondly, the board of directors authorized the repurchase of $500 million worth of its common stock, effective immediately. In case you are not familiar, repurchasing shares reduces the amount of share available in the market. This in turn boosts earnings per share, making the remaining shares more valuable.

In summary, the earnings and revenues for the quarter may have missed expectations, but Church & Dwight more than made up for it with the dividend hike and share repurchase program. The company's stock has reacted by moving more than 11% higher in the months since, setting new highs along the way.

Expectations & what to watch for
First-quarter results are due out before the market opens on May 1. Analyst expectations may seem dim, but there is a positive reason for this. Here's an overview:

MetricExpectedYear Ago
Earnings Per Share $0.73 $0.76
Revenue $783.9 million $779.3 million

Source: Estimize

These estimates call for earnings per share to decrease 3.9% and revenue to increase 0.6% as compared to the same period a year ago. This compliments Church & Dwight's expectations because it stated that the majority of its growth would take place in the second-half of the year due to the scheduled release of "innovative new products," which will result in increased expenses related to slotting, couponing, trade promotions, and marketing during the first half. New products may cause one quarter's growth to stall, but could ultimately lead to future success.

Screen Shot

Source: FirstResponse.com

With all of this being said and the key metrics aside, there will be three crucial updates and statistics to watch for:

  1. It will be of the utmost importance for Church & Dwight to provide outlook on the second-quarter that is within analyst expectations. The current consensus estimates call for earnings per share of $0.68 and revenue of $811.8 million, representing year-over-year increases of 11.5% and 3.1%, respectively. Also, in terms of guidance, it will be important for the company to reaffirm its full-year guidance, which projects earnings per share in the range of $2.96-$3.07 and organic sales growth of 3%-4%. 
  2. Watch for comments on the success or failure to-date of the aforementioned "innovative new products." New products will play a pivotal role in earnings and revenue growth in 2014, so we need to be sure that they have begun to take share of their respective categories. We will also want to make sure that the company feels these products are on pace to bring in more revenue than was spent bringing them to the market and making consumers aware of their presence.
  3. In its fourth-quarter report, Church & Dwight stated that it had begun to "aggressively pursue" acquisitions, so investors will want to watch for updates on potential takeover targets. We have not seen a significant acquisition by the company in quite some time, so it would be great if it were to find the right acquisition at the right price.
If Church & Dwight can meet or exceed analysts' earnings and revenue expectations and satisfy the three elements listed above, and I think it will, the company's stock will likely continue its run higher in 2014. For these reasons, I would be a long-term buyer going into the report and would add to the position if any weakness were to set in following its release.

A sign of things to come?
Procter & Gamble, one of the largest consumer product manufacturers in the world and the company behind competing brands such as Crest, Tide, Gain, and Old Spice, released its third-quarter results just a few days ago on April 23. Its report will give us a good feel for the condition of the industry and consumer, so here's what the company accomplished:

MetricReportedExpected
Earnings Per Share $1.04 $1.02
Revenue $20.56 billion $20.73 billion

Source: Benzinga

Screen Shot

Source: Procter & Gamble

P&G's earnings per share increased 5.1% and revenue decreased 0.2% year-over-year as organic sales increased 3%. Global volume rose 3% during the quarter, and this was led by growth of 6% in the fabric and home care segment. It is also worth noting that none of P&G's five segments reported negative volume growth; this shows that all categories of consumer products saw increasing demand during the quarter.

I believe that P&G's strong quarter is a positive sign for Church & Dwight and adds support to the idea of initiating a long-term position. However, if you are not sold on Church & Dwight, take a closer look at P&G because it represents a great opportunity in itself.

The Foolish bottom line
Church & Dwight is set to release quarterly results in a couple of days, and the current analyst estimates seem well within reach. I believe that Foolish investors should strongly consider initiating a long-term position right now. The potential price appreciation and healthy 1.8% dividend can provide significant returns over time. Take a closer look and see if there's a place in your portfolio for a consumer product giant like Church & Dwight. 

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Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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