Church & Dwight: Leaving The Black Swan Behind

Amy Sussman

Introduction

Church & Dwight (NYSE:CHD) is considered by much than 1 investor a well-oiled compounding machine owed to its expertise to scope semipermanent results astatine a dependable pace. The motor of this instrumentality is nan "evergreen model" of the institution that focuses connected invention and connected building a portfolio made up of beardown brands that are usually either nan apical aliases nan 2nd largest subordinate successful a peculiar segment. This exemplary makes nan institution committed to delivering 3% yearly integrated nett income growth, gross separator description and 8% EPS growth.

Church & Dwight has precocious held its Analyst Day and has taken portion astatine nan CAGNY 2023 convention aft a reliable twelvemonth for nan company's financials.

Let's return a spot of clip to spell complete nan full image to spot if it tin still beryllium a train to hop on.

An overview of nan company

For those who don't cognize what nan institution is aliases does, it is capable to opportunity that, founded backmost connected nan halfway business of bicarbonate of soda preparation, it has, since then, developed a wide scope of products utilizing baking soda to clean, deodorize, leaven and buffer. Currently, astir 43% of nan company's home user products are sold nether nan Arm & Hammer brand. The merchandise portfolio is besides good balanced pinch 40% of worth products and nan different 60% made up of premium conception products. As acold arsenic segments go, we person 48% of income successful nan individual attraction segment, different 46% of full income travel from nan family products 1 and nan remaining 6% of income coming from nan specialty products section ('SPD'). Those who are unfamiliar pinch nan main brands nan institution owns, tin look astatine this descent to spot really they are dispersed crossed a diversified portfolio. But I besides urge going done nan CAGNY 2023 position to get a amended knowing of nan full company's portfolio.

CHD Analyst Day 2023

What makes Church & Dwight's portfolio alternatively valuable is its debased vulnerability to backstage labels, arsenic seen successful this descent below, which I want to constituent retired because it shows really nan institution wants to protect its margins.

CHD Analyst Day 2023

In addition, only 5 of nan 17 merchandise categories Church & Dwight owns person backstage explanation vulnerability and these are gestation trial kits, baking soda (where Church & Dwight owns an highly beardown brand: Arm & Hammer), gummy vitamins, toothache, clumping litter.

So, nan institution is chiefly a family and individual attraction products one. Through its expertise of carrying retired bully acquisitions, it has been capable to turn consistently, arsenic shown successful this graph.

CHD Analyst Day 2023

If we comparison this chart pinch Church & Dwight's banal performance, we tin spot moreover amended why it has been capable to drawback immoderate attraction from semipermanent investors: nan banal has crushed nan S&P500 since 2000.

Data by YCharts

Church & Dwight reported its Q4 2022 earnings and released its yearly form 10-K. Let's return a spot of clip to look astatine nan company's financials erstwhile again to spot really it fared done an inflationary situation that was so challenging for immoderate family products companies.

Financials

The first astonishment I had was to spot nan institution authorities that it presently only owns 14 powerfulness brands. However, nan caller Hero acquisition had brought nan count up to 15. What happened?

Church & Dwight disclosed that its Flawless marque is not portion of nan powerfulness brands anymore arsenic this acquisition didn't move retired arsenic it was expected to. In fact, Church & Dwight reported that 1 of its awesome retailers discontinued Flawless products, starring nan institution to see a $411 cardinal impairment complaint of Flawless intangible assets.

The latest results overgarment a somewhat mixed image astir Church & Dwight's performance. The institution seemed to beryllium capable to meet astir of its goals, arsenic income grew by 3.6% reaching $5.4 billion. To understand really important nan powerfulness brands strategy is, investors should cognize that 85% of income and profits of nan institution travel from these 14 brands.

However, integrated income grew only by 1.4%, coming successful rather short of nan 3% extremity nan evergreen exemplary sets. Even much concerning is nan reported gross separator contraction which led to a important -170 bps effect. When I looked astatine reported EPS, I was taken aback: -49% YoY. How was that imaginable for a institution that is considered to beryllium very coagulated and reliable? Here we person to spot erstwhile again nan effect of nan impairment complaint of Flawless intangible assets. Without this, nan company's EPS would person declined by only 1.7%. It still is not connected target, but it is overmuch much acceptable.

One point I liked astir Church & Dwight's guidance was nan transparency astir nan disappointing results, arsenic Mr. Farrell - President, CEO & Chairman of nan institution - admittedly said during nan earnings call:

The first 15 years pinch Church & Dwight -- each year, we've had important TSR [total shareholder return]. And successful many, galore years, it's been double digit. And this year, we went backwards.

And that's a disappointment to me, it's a disappointment to nan guidance team, to nan Board and our shareholders. And so, granted, we person that disappointment.

I person to opportunity that it is not arsenic accustomed arsenic it should beryllium to spot nan CEO of a institution admit an unsuccess, without hiding it.

In fact, we had already seen really the rumor of separator compression was affecting nan institution owed to slower income maturation and earthy worldly costs.

Now, nan institution had stated much than erstwhile that successful nan 2nd half of nan year, arsenic it would person had a amended inventory guidance pinch little proviso concatenation issues, it would person started spending much adequately connected marketing.

It seems for illustration this strategy is paying off, arsenic 13 retired of 17 cardinal categories saw a Q4 growth.

CHD Analyst Day 2023

Since my past article, I was peculiarly willing successful seeing really the Hero acquisition is performing. It seemed to be, successful fact, a bully acquisition astatine a price/sales aggregate of 5.5. Considering nan monolithic use nan Hero marque could find done Church & Dwight's standard erstwhile speaking of points of distribution, it seemed to maine rather easy to understand that nan existent guardant aggregate is overmuch lower. In fact, astatine nan clip of acquisition, Hero had a minuscule distribution web compared to different brands specified arsenic Neutrogena, Clean Clear aliases Clearasil. Hero has now been pinch Church & Dwight conscionable for 90 days, but it looks for illustration it is connected a promising way to present a very beardown 2023. Considering nan standard effect of Church and Dwight's distribution network, I would not beryllium amazed to spot this marque double its income by nan extremity of nan year, meaning that it could bring an other $150 cardinal of revenues to nan company. This unsocial would person a 2.7% effect connected nett income growth.

CHD Analyst Day 2023

I really bought nan banal correct aft it dipped, pursuing nan announcement of nan acquisition.

The rumor of separator compression

The existent rumor Church and Dwight reported was separator compression. Gross separator came successful astatine 41.9% of nett sales, 170 bps little compared to nan 43.6% of 2021, which had already been a antagonistic separator compared to nan 45 and alteration Church & Dwight had gotten investors utilized to.

Even worse was nan operating separator performance, plunging from 20.8% to 11.1%. However, we person seen really this is simply a consequence of nan impairment complaint of Flawless. Though not pleasant (I want Church & Dwight to prosecute accretive and valuable acquisitions), I americium consenting to springiness nan institution a walk since without this expense, nan institution would person been okay, operationally speaking, reaching an 18.8% margin. In 2021, nan institution was astatine a 20.8%, but it usually was conscionable supra 19%. So, an 18.8% successful an inflationary situation is acceptable.

However, I americium assured nan rumor is mostly down nan institution some because of macro conditions, which make maine deliberation ostentation has so peaked, and because nan institution had to region its trading expenses owed to debased merchandise availability. Now that inventories are backmost up, Church & Dwight has accrued its trading walk up to 10.5% of sales, launching a run called "give it nan hammer".

Valuation

Given nan EPS plunge we person seen, nary wonderment nan TTM PE ration has skyrocketed to a 50. Here we are earlier an absorbing business where, without putting valuation multiples into context, we would deem correct distant nan institution arsenic excessively costly and measurement overpriced. However, nan fwd PE looks much reasonable arsenic it presently stands astatine 27. The quality betwixt nan 2 multiples is immense and we already cognize what abnormally reduced nan denominator this past year. In immoderate case, nan banal is not precisely a steal, but it is nearing nan little portion of nan scope CHD has been trading astatine for nan past decade.

Data by YCharts

As acold arsenic my discounted rate travel study goes, I still instrumentality to nan 1 I shared a fewer months agone that sees a beardown bargain territory nether $70. Currently, nan banal seems to maine reasonably priced. This is simply a business wherever semipermanent investors shouldn't beryllium excessively acrophobic of initiating aliases expanding a position.

As for me, I bought my first shares conscionable beneath $80. Currently I americium not adding aggressively, moreover though I prime up immoderate shares each erstwhile successful awhile. I deliberation this twelvemonth we should spot family products stocks waste and acquisition down a bit, arsenic immoderate investors whitethorn exit their much protect positions to build up a much fierce portfolio. Therefore, for nan diligent investors, I judge we are earlier a clip wherever location will beryllium respective chances to efficaciously dollar-cost-average into it.

I attraction connected agelong word maturation and dividend maturation investing. I travel some nan US and nan European banal markets, looking for undervalued banal and/or for precocious value dividend increasing companies that supply maine pinch rate to reinvest. I put only successful banal of companies that tally a business I understand done nonstop experience.