Consumer staples company Church & Dwight (CHD +2.39%) has joined a growing list of companies that have seen their stock punished after reporting soft guidance in their recent earnings reports. Shares are down almost 15% from their highs of $105 a share.
Investors are worried about a lot right now; companies are talking about a weakening economy, the war in Europe continues, and inflation is hitting consumers' wallets.
You can use this to your advantage. Here is why investors should consider buying shares of this Dividend Aristocrat if they continue falling.
Image source: Getty Images.
Short-term fear creates a long-term opportunity
Church & Dwight is a household products company that sells several niche brands, including Orajel, Trojan, First Response, Xtra, and others that make up the company's 14 "power brands." Of course, the Arm & Hammer brand of baking soda headlines this list; it has been the centerpiece of Church & Dwight since its founding in 1846.
NYSE: CHD
Key Data Points
The company reported its first-quarter 2022 results in late April and noted how high inflation on costs would hurt profitability for the year. Management indicated that price increases wouldn't go into effect fast enough and that earnings-per-share (EPS) growth for 2022 would come in at the bottom of guidance, at 4% over 2021.
Church & Dwight feels inflation like most other companies out there, but investors are scared right now and are not giving companies much slack. News corporation CNN tracks investor sentiment through its "Fear and Greed Index" and indicates that the market's in a state of "extreme fear."
Church & Dwight is fundamentally strong
To be clear, management still expects increasing profits in 2022; wouldn't fear-stricken investors feel good about a company that can grow earnings in such a challenging environment? Retailer Target recently reported earnings, and operating profits declined by more than 40% year over year.
Church & Dwight is a battle-tested company, a Dividend Aristocrat that's raised its dividend for the past 25 years. Here you can see how its revenue, free cash flow, and bottom-line profits have steadily grown over roughly four decades.
CHD Revenue (TTM) data by YCharts
Management calls its core business an "Evergreen Model," where shareholders can expect organic sales to grow 3% and EPS to grow 8% on average indefinitely. Well-executed acquisitions and share repurchases have helped the company exceed that, averaging 6% annual revenue growth and 12% EPS growth over the past decade.
Church & Dwight is facing short-term inflationary challenges, but it seems unwise to ignore its long history of excellence. The company has proven to be a long-term winner that has repeatedly shown that it can steadily grow its top and bottom lines. Whether investors trust that to continue is up to them.
The stock is finally becoming reasonably priced
Investors who remain confident in Church & Dwight should celebrate the stock's recent slide. Strong fundamentals have earned the stock a premium valuation; its median price-to-earnings ratio over the past decade is nearly 27, a seemingly high P/E for a company growing profits at a low-double-digit pace.
CHD PE Ratio data by YCharts
The stock's decline puts the P/E ratio close to this long-term "norm." In other words, the stock could hold its current valuation, and investors would see average total returns of 12% over the long term from EPS growth, plus another 1% from the dividend. I think many investors would welcome 13% total annual returns from an investment as resilient as Church & Dwight. That alone makes the stock attractive at its current price, while further declines would be icing on the cake if the bear market continues.
Investing is often more straightforward than many would expect: Buy quality companies when they go down for silly reasons, and wait for solid fundamentals to lift them back up eventually.
