Is Church & Dwight the Missing Piece in Your Portfolio?

Church & Dwight (NYSE: CHD  ) , the leading producer of baking soda in the US and the company behind numerous consumer brands such as Arm & Hammer, OxiClean, Trojan, First Response, and Nair, has watched its stock steadily rise in 2014, but it has underperformed the overall market. The company reported a decline in profitability in the first quarter, which may have held its stock back, but it could get back on the market's good side when it releases its second-quarter results on August 1. With this in mind, let's take a look at Church & Dwight's most recent earnings release and the expectations for the upcoming report to determine whether it is gearing up to beat the estimates and if it represents a good long-term investment opportunity today.

Source: Church & Dwight's LinkedIn

The mixed but strong results
On May 1, Church & Dwight released its first-quarter report to kick off fiscal 2014's earnings and the results came in mixed in comparison with expectations; here's a summary:

Metric Reported Expected Year Ago
Earnings Per Share $0.73 $0.73 $0.76
Revenue $782.00 million $783.34 million $779.30 million

Source: Estimize

Earnings per share decreased 3.9% and revenue increased 0.3% year-over-year, led by global volume growing 4.4% and organic sales rising 1.2%. At first glance, the earnings per share results may seem extremely weak, but this is exactly the kind of performance Church & Dwight had expected because it brought numerous new products to market during the quarter.

Source: Wikimedia Commons

The new product releases resulted in increases in marketing, slotting, and couponing expenses which led to gross profit decreasing 3.1% to $442.6 million and operating profit decreasing 4.3% to $162 million; in relation, the gross margin contracted 150 basis points to 43.4% and the operating margin contracted 100 basis points to 20.7%. The company noted that it expects margins to remain under pressure in the second quarter as well, but it expects new product-related expenses of less significance in the second half.

Lastly, Church & Dwight noted that it repurchased $260 million worth of its common stock and paid out $42.5 million in dividends during the quarter. The company went on to state that it expects to make additional share repurchases throughout the rest of the fiscal year and it is more than safe to assume that it will continue to pay dividends, as its last payment on June 2 marked its 453rd consecutive quarterly dividend payment.

Overall, it was a fantastic quarter for Church & Dwight and the company noted "initial success" with its new products, which provides excitement for investors going forward. The company's stock responded to all of this news by falling 1.36% in the next trading session, but it recouped the losses and set new all-time highs in June before another wave of negativity hit it. Maybe strong second-quarter results will enable a sustained rally back to these highs.

What should you expect out of Church & Dwight?
Church & Dwight has scheduled its second-quarter results for release before the market opens on August 1 and the current expectations call for slight growth; here's a breakdown:

Metric Expected Year Ago
Earnings Per Share $0.62 $0.61
Revenue $805.37 million $787.60 million

Source: Estimize

The estimates above call for earnings per share to increase 1.6% and revenue to increase 2.3% year-over-year, which would be an improvement from the first quarter and would be impressive given the ongoing product launches. Other than the key metrics, here are four other statistics and updates to watch for:

  1. Third-Quarter Outlook: It will be important for Church & Dwight to provide an outlook on the third quarter that meets the expectations of analysts; currently, the consensus estimates call for earnings per share of $0.87 and revenue of $834.85 million for year-over-year growth of 14.5% and 3.7%, respectively. Church & Dwight has continually stated that the majority of its earnings growth in fiscal 2014 will take place in the second half of the year, so the company needs to deliver an outlook which supports this promise.
  2. Full-Year Outlook: Along with adequate guidance for the third quarter, it will also be important for Church & Dwight to reaffirm its full-year outlook on fiscal 2014; this outlook, provided in its first-quarter report, projects earnings per share increasing 7%-9%, organic sales increasing 3%-4%, and gross margin contraction of 50-75 basis points from fiscal 2013.
  3. Margins: As noted several times in this article, new products released by Church & Dwight have caused and will continue to cause margin contraction in the first half of the year, but investors will want to watch closely and make sure that its margin does not fall too sharply in the second quarter; in the first quarter, it contracted 150 basis points and the company only anticipates contraction of 50-75 points for the full year, so it would be ideal for the margin to contract 150 basis points or less in the second quarter. 
  4. Share Repurchases: Last, but not least, watch for the total shares repurchased during the quarter. Church & Dwight generates ample free cash flow each quarter and it ended the first quarter with approximately $300 million in cash and cash equivalents, so it could easily surpass its first-quarter share repurchase of $260 million while also maintaining its $0.31 quarterly dividend.
If Church & Dwight can satisfy these earnings per share, revenue, and outlook estimates, its stock could easily push to new highs, which would also result in new all-time highs; I believe it will do exactly this, driven by growth in both its core brands and its newly released products. In addition, I believe investors could buy Church & Dwight right now, because it trades at just 20 times forward earnings and has a very strong 1.8% dividend, which it has paid every year since 1901 and raised for 18 consecutive years -- this shows that the company is truly dedicated to maximizing shareholder value.

Source: OxiClean

The Foolish bottom line
Church & Dwight is home to some of the United States' most popular consumer brands and it has been very active in releasing new products to grow its market share in numerous categories. The introduction of new products caused a slight dip in profitability in the first quarter and it will hold back earnings growth in the second quarter as well, but this is a short-term sacrifice the company is willing to make in order to drive long-term grown. Foolish investors should support the moves being made by Church & Dwight and strongly consider initiating positions in it right now, so its price appreciation and healthy 1.8% dividend can provide them with substantial returns over the next several years.

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