Church & Dwight: An American Icon Since 1846

With the recent woes in the market caused by the conflict in Syria, we as investors must make sure our investments are as sound as possible. Being in safe investments allows us to sleep well at night and know that we will come out on top more often than not. Church & Dwight  (NYSE: CHD  ) fits the description of "best of breed" and has come down over 13% from its 52-week high. This company could be the beaten down name we have all been looking for. 

The company 
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, as well as paired with other specialty chemicals for industrial, institutional, medical, and food applications. 

Second quarter results 
On August 2, Church & Dwight released its quarterly results. Like many companies reporting recently, it beat on earnings but missed revenue expectations. Here is an overview of the report:

  • Earnings per share of $0.61 vs. expectations of $0.60
  • Revenue of $787.6 million vs. expectations of $790.87 million
  • Gross margin expanded by 110 basis points to 44.6%
Earnings per share increased 8.93% and revenue increased 13.1% compared to the same period in 2012. Domestic sales of consumer products grew a strong 17.4% in the second quarter, while international sales grew a respectable 9.4%. The disappointing part of the report was the slump in the specialty products segment; net sales fell 12% from 2012, primarily due to colder weather causing demand to decline in the dairy industry. This segment alone could be held responsible for the missed revenue expectations, but regained strength in future quarters will allow for beats on both the top and bottom lines once again.

Outlook 
For the third quarter, management expects the company to earn approximately $0.73 per share; this would represent 10.6% growth year over year. For the full year of fiscal 2013, the company projects earnings of $2.79 per share, which would be a 13.9% increase in earnings from fiscal 2012. Analysts expect this growth to continue through 2015. 

Source: YCharts

  • 2014: 11.11% growth
  • 2015: 8.7% growth
Church & Dwight's average price-to-earnings ratio over the last five years is 20.85. If it continued to trade at this average multiple, the stock would exceed $70 per share in 2015. This represents an upside of about 23% from current levels. 23% in just two years is enough to entice any investor.

Dividend aristocrat
On August 1, 2013, Church & Dwight declared its 450th consecutive quarterly dividend. This dates its streak of payments back to 1901, surviving the Great Depression, the Great Recession, and every other hectic time in the market. Making it through the toughest of times allows investors to remain confident that this dividend income will always be there; not to mention that the payments have been raised for the last 17 consecutive years. The company currently pays out $1.12 annually, representing a yield of roughly 1.97%. Earnings growth, dividends, and dividend growth make Church & Dwight a triple threat. 

Expanded view on the industry
Ecolab  (NYSE: ECL  ) and Stepan Company (NYSE: SCL  ) are two of Church & Dwight's fellow companies in the cleaning products industry. Ecolab manufactures and markets cleaning products and services to various industries worldwide. Its products range from sanitizers and detergents to lubricants and safety products. 

Stepan Company produces and markets specialty and intermediate chemicals worldwide. Its main focus is on surfactants, polymers, and specialty products; these three segments manufacture chemicals used to produce cleaning products, insulation and adhesives, and nutritional oils. 

Company Church & Dwight Ecolab Stepan Co.
Market Cap $7.87 billion $27.95 billion $1.25 billion
P/E 21.77 33.28 16.56
Forward P/E 18.33 22.18 12.40
5-year Avg. P/E 20.85 27.24 12.67
Dividend Yield 1.97% 1.00% 1.14%
YTD Performance 4.15% 24.75% 0.12%

(Source: Yahoo! Finance and YCharts)

The three are all very similar, but can be differentiated enough that they are not direct competitors. Church & Dwight offers products to the individual consumer, but also has a large segment answering to the baking soda needs of larger industrial companies. Ecolab's focus is more on business-to-business sales and Stepan provides the ingredients needed to manufacture end products.

With that said, they all have strong fundamentals. However, Church & Dwight is the only one that is not trading well above its average price-to-earnings multiple. This means Ecolab and Stepan have room to come down, while Church & Dwight could trade sideways and still remain healthy for the rest of the year. Ecolab is a strong dividend play, with consecutive raises for 20 years, but I would like to see it come down another 5% before considering an investment. Stepan does not command enough market share for my interest, so I would steer clear of this one for now.

The bottom line
Church & Dwight is an undervalued American icon that has the potential to outperform the market for the next decade. It has grown earnings by 10% or more in 17 of the past 18 years, and it is expected to maintain a strong growth rate through 2015. Do your portfolio a favor and take a closer look at this one.

 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2013, at 10:29 AM, tsabatini wrote:

    Church and Dwight - NOT JUST STODGY-

    Yes, very solid company, good dividend, brand name products, BUT, they recently purchased Vitafusion and Lil Critters gummy vitamins! That's a huge market, AND these are the only gummy vitamins actually produced with palatability as a major consideration. Check the Amazon.com ratings on the items. These are the days of supplements to either enhance or prevent everything imaginable --- but they're not all easy to swallow.

    VERY GOOD ACQUISITION.

    Read all about it: Pasted from

    http://drugstorenews.com/article/church-dwight-acquires-vita...

  • Report this Comment On September 13, 2013, at 10:43 AM, JoeySolitro1 wrote:

    I agree! Vitafusion and Lil Critters were great additions to the product line and gives immense exposure to a growing market.

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