Church & Dwight's (CHD) management definitely delivered a strong quarter this past week, with appealing commentary on the conference call which was held on November 5th 2012. Some of the most promising improvements reported was growth in international business and increased margins as a whole. In addition, new products showing promising growth prospects should compliment strong brands and an accretive acquisition, which will be a driver of growth for 2013.
- International Business Reinvigorated:
After disappointing sales in Q2 of 2012, the international business segment achieved a strong improvement with organic growth of 6.7% in Q3 2012. This was driven by strong sales gains across a diverse set of markets and countries including Australia, Western Europe, Mexico and Brazil, with new product lines and improved margins.
- Margins Improved:
Declining margins started to worry shareholders in the first half of the year. In response, management promised new initiatives for the second half of 2012 to combat this plaguing metric from spreading further. For the third quarter, CHD owned up to its promises by reporting a 100 basis point improvement in gross margins versus Q3 2011. Management expects an even stronger improvement in gross margins for the fourth quarter.
- New product lines showing strength:
- ARM & HAMMER cat litter. The Ultra Last line, along with the older yet successful Double Duty line, hold over 50% of the brand's total cat litter sales. A&H cat litter has increased 15% in sales growth and a 2.4% share gain in Q3 2012 versus 2Q 2012. The ARM & HAMMER cat litter segment has achieved 35 consecutive quarters of net sales growth and 10 consecutive quarters of share gains. Compared to other brands, it is number two in the kitty littler business.
- ARM & HAMMER liquid laundry detergent for sensitive skin: With an estimated of 50% of consumer households with sensitive skin issues, management believes this will help drive growth of ARM & HAMMER's liquid laundry detergent product. This segment has performed very consistently, with 14 quarters of consecutive growth.
- Oxiclean: The OxiClean dishwashing booster product enhances common dishwashing detergents. This new product has achieved a 10% share of the dishwashing additives category despite just entering the market just seven months ago.
- Trojan: This iconic brand currently holds a whopping 76.6% market share in the condom industry, up 1 full basis point from a year ago. Trojan's share growth was helped by a new product called CHARGED. Another new product is the "Vibrations" line. The vibrator category is over $300 M in size, with almost no competition from other major brands. First introduced in 2005 with Trojan brands, the vibrations line consumption numbers as a whole improved 25% for the quarter.
- Acquisition of the Avid Health Brand Holds Promise:
Avid Health is an up and coming vitamin and mineral company, which is exposed to the obviously attractive vitamin market. This market is one of the fastest growing segments of consumer goods, boasting a 5% growth rate. CHD recognized this opportunity in this market, and feels the Avid brand could grow two fold, let by its gummy vitamin business.
Avid is growing like a weed, with sales tripling over the last three years, and is one of the fastest growing vitamin mineral and supplement businesses out there. In the Q3 earnings call, management expects the Avid brand to account for 4% to 5% of EPS growth in 2013 alone. This is nearly 30% of the total 13% to 15% total EPS growth forecasted for 2013.
To put CHD's valuation in perspective, let's compare with competing consumer goods stocks:
|Stock||Church & Dwight||Procter & Gamble (PG)||Chlorox Inc. (CLX)|
|Flagship Brands:||Arm & Hammer, Trojan, Avid||Gillette, Crest, Tide, Pampers, etc.||Chlorox Bleach, Kingsford, Glad, Brita, Hidden Valley, etc.|
|1 Year EPS Growth est.||14%||4%||7%|
1 Year PEG
|Market Cap||$7.1 B||$183 B||$9.5 B|
Compared to PG and CLX, which are solid companies by most value metrics and brand considerations, CHD seems to offer a compelling alternative. With respect to an estimated 14% EPS growth for next year, CHD boasts an approximate 1 year PEG ratio of 1.56x. This makes CHD's P/E ratio of 21.9x ttm EPS seem more attractive relative to earnings projections. It also seems to compensate for CHD's lower dividend yield, which is less appealing than PG and CLX.
Overall, CHD seems like a healthy alternative to the better known PG, and possibly CLX. With 20% exposure to foreign markets, CHD is primarily based in the US, which could be a strength considering recent events worldwide. In addition, CHD's brands have shown strong results. Driven by consistent brands like Arm & Hammer, Trojan, and Avid Health, CHD's portfolio offers a diverse product mix, while still allowing for opportunities of synergy in supply chain and production aspects. With management's forecasts of 15% EPS growth through 2013, CHD is a worthy alternative to competing companies in the space, and can be considered at current share prices.
Additional disclosure: I have owned PG and CLX in the past 12 months