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Church & Dwight Analysis

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By TMFKitKat
October 14, 2008

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[See post for tables.]

Church & Dwight is the very definition of a defensive stock. It has survived since 1846 and will survive this current nastiness. The company is seen as so solid it has not even cracked its 52-week low yet. While the markets were setting records last October, CHD was at its low. It is now up 16% attesting to the fact it has been a favorite defensive play.

CHD founders first marketed baking soda in 1846 for use in home baking. Today, baking soda is used for refrigerator and freezer deodorizer, scratchless cleaner and deodorizer for kitchen surfaces and cooking appliances, bath additive, dentifrice, cat litter deodorizer, and swimming pool pH stabilizer. The magic of marketing-CHD knows how to do it.

In 2007, household products was 64% of domestic sales and 45% of total sales.

What I love about CHD is the dominant position of its brands. I looked at Clorox not too long ago, and it was clear, more than a few of their brands could not compete on the shelf.

Some product highlights

Laundry detergents constitute its largest consumer business, measured by sales volume. They are marketed as value products, priced at a discount from products identified as market leaders. This strategy should help as consumers cut back. XTRA laundry detergent is marketed at a slightly lower price than ARM & HAMMER brand laundry detergents. CHD also markets OXICLEAN pre-wash laundry additive. OXICLEAN is the number one brand in the laundry pre-wash additives market in the U.S-we have Billy Mays to thank (anyone else have the urge to duct tape his mouth shut? But apparently it works).

ARM & HAMMER SUPER SCOOP clumping cat litter is the number two brand in the clumping segment of the cat litter market.

CHD entered the personal care business (PCP) using the strength of its ARM & HAMMER trademark and baking soda technology, and has expanded its presence through acquisition of antiperspirants, oral care products, depilatories and reproductive health products.

In 2007, PCPs were 36% of domestic sales and approximately 26% of total sales.

The NAIR line of non-shaving hair removal products is the number two brand in the United States

International

Canada, France, the United Kingdom and Mexico accounted for 31%, 21%, 20% and 11%, respectively of international sales in this segment in 2007. No other country accounts for more than 10% of its total international net sales in this segment, and no brand accounts for more than 12% of its total international net sales in this segment.

Specialty Chemicals (SPD)

These include industrial strength producuts and animal nutrition. It consists of the manufacture and sale of sodium bicarbonate in a range of grades and granulations for use in industrial and agricultural markets. In industrial markets, sodium bicarbonate is used by other manufacturing companies as a leavening agent for commercial baked goods, as an antacid in pharmaceuticals, as a carbon dioxide release agent in fire extinguishers, as an alkaline agent in swimming pool chemicals, and as a buffer in kidney dialysis.

A special grade of sodium bicarbonate, as well as sodium sesquicarbonate, is sold to the animal feed market as a feed additive for use by dairymen as a buffer, or antacid, for dairy cattle.

MEGALAC is a CHD made from natural oils, which enables cows to maintain energy levels during the period of high milk production, resulting in improved milk yields and minimized weight loss.

BIO-CHLOR and FERMENTEN for dairy cows improves rumen feed efficiency and help increase milk production.

CHD also provides a line of cleaning and deodorizing products for use in commercial and industrial applications

The company has fairly diversified but related products

As a percent of sales by segment, CHD also diversifies and all segments have respectable and fairly stable percentages.


Consolidated results and why

2007
`
Net Sales were $2,220.9 million for a 14.1% again yoy
The increase is largely due to the OGI acquisition-- August 2006, and the SPINBRUSH toothbrush business, which collectively accounted for approximately 8% of the increase in net sales.

Forex was 1% of the increase.

That means the organic growth was around 5%. This is not fast growth and I would not count n 14% every year. Modeling earnings might be better done at lower than 14% growth. The 5% is not bad but it is the difference between a fast growing company and a slow growth but dependable stalwart. There is the possibility the company will be able to make acquisitions in the future but I am inclined not to count on this as a method of growth

Gross margins were flat. The improvements from the acquisition were offset by higher trade promotion and slotting expense

In 2006 net sales grew 12%. Again acquisitions accounted for a portion-around 9%. The company also increased prices adding 3% but experienced lower volume of around 2%.

Gross increased on the price increase and the acquisition. The margin improved 2.4%

2006, price increases ranged from 4% to over 10% for products representing about 35% of its U.S. consumer products portfolio's net sales--ARM & HAMMER and XTRA liquid laundry detergents, ARM & HAMMER SUPER SCOOP cat litter and ARM & HAMMER baking soda. CHD believes the price increase caused the lower product demand as consumers adjusted to the higher prices. However, price increases likely improved margins. It is a given consumers are going to be exquisitely sensitive to price going forward and CHD may be in a bind if it tries to grow through more increases.

Consumer International

2007

Net sales were $388.3 million, an increase of $51.4 million, or approximately 15% yoy. Of the increase, approximately 3% is from acquisitions, 8% is associated with favorable foreign exchange rates leaving 4% organic growth (close to domestic growth)

2006

Net sales were $336.9 million in 2006, an increase of $39.6 million or 13.3% Again part of this is acquisition and forex related.

Specialty Products

2007

Net sales were $258.5 million in 2007, an increase of $38.2 million, or 17% as compared to 2006. The increase is due to higher unit volumes and improved pricing in both animal nutrition and specialty chemicals. The animal nutrition sales increase also reflects a pricing surcharge of $3.5 million enacted during the third quarter of 2007 on certain products, which partially recover extraordinary cost increases for PFAD.

There were no acquisitions contributing to growth. This is a nice performer if somewhat measured.

Margins

Without acquisitions single digit growth is more likely than some of the higher growth of years past. Without price increases (if the company elects to forgo them in the current downturn) growth will suffer. The next year or two may see some growth numbers closer to LTM than 2004.

The increasing margins have of course given a pretty nice boost to EBIT and net income growth in recent years.

IMO the company is never going to be a fast grower as we can see from the 2007 and 2006 results. But it is reliable.

Debt

In the current freezing climate for being able to refinance, debt levels are important and the maturity is key.

CHD has a fair amount of debt. CHD has total debt $739.7 million (recent Q) -- 41% at a fixed rate. Part of that is convertibles. The company estimates conversion would be 3 million shares

In 2003, CHD issued $100.0 million principal amount of 5.25% convertible senior debentures due August 15, 2033.
Holders may convert their debentures into shares of the Company's common stock prior to maturity at a conversion rate of 32.26 shares of common stock per each $1,000 principal amount of debentures, which is equivalent to a conversion price of approximately $31.00 per share, subject to adjustment in certain circumstances. The stock is now around $54 and at the end of 2003 the price was in the mid-$20s.

Two big years approaching-
2010 is $149 million to the loan facility
2012 is $334 million for the loan facility and 6% senior subordinated notes.

Current CFFO comes close to covering 2012. My guess is they will never use 100% of cffo for debt repayment and could end up refinancing. By 2012, the credit market might be working again.

The remaining is primarily comprised of term loans under the credit agreement and a receivables purchase agreement.

The weighted average interest rate on all these borrowings was approximately 5.8%.

CHD has two cash flow hedge agreements, each covering $100.0 million of zero cost collars, one effective as of September 29, 2006, and the other effective as of December 29, 2006, to reduce the impact of interest rate fluctuations on its term loan debt.

Some of the debt was taken on for acquisitions. OGI was their biggest acquisition of the past 5 years. It has been instrumental in sustaining double digit growth in 2006-2007

Orange Glo (OGI) --August 7, 2006 for $325.4 million, plus fees of approximately $4.4 million, which was financed through a $250.0 million addition to the Company's existing bank credit facility and available cash.

Returns


Return on Assets    8.5%
Return on Capital  11.0%
Return on Equity   17.1%



Value?

Not easy to know the value but have a feeling it is not selling at discount as it stays pretty solid as a probable safe haven in these turbulent markets.

CHD was evaluated at 9% growth for 8 years and 11% discount with 3% terminal growth. The cost of capital is 9.7%
The value is around $50 for its current free cash flow at these levels of growth

ROIC are 11% and the WACC is 9.7%. It is creating some value with a positive spread

Church has not suffered as a lot of others have during the last horrendous week. I suspect the company is viewed as a rock solid island of safety in a sea of uncertainty

CHD does have several weaknesses that preclude investment as a sure thing

High level of debt may prove to be a problem if it needs to refinance. By 2012 all this may be behind us making this moot

Growth could be slower than past results would lead us to believe. If there are no suitable acquisitions to push growth as OGI did, it is going to look a ittle less promising

At present with consumers looking for value, there is likely to be some resistance to price increase and if CHD tries to grow through price hike, there may be a backlash in lower volume.