Church & Dwight Clobbers Procter & Gamble Among Consumer Staples

| About: Church & (CHD)
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I can't tell you how many times I have heard some analyst on one of the financial channels extolling the virtues of Procter & Gamble. With powerful brands like Crest toothpaste, Clairol hair products, Gillette shaving products, Ivory soap, Head & Shoulders shampoo, Tampax, Charmin, Tide, Vicks, Pringles, and many more, it is no wonder the stock gets so much attention.

I wish I had a dollar, or maybe a pack of shiny new Gillette blades, for every time Jim Cramer has mentioned Procter & Gamble as one of the greatest stocks around. Believe it or not, however, this very widely held $176 billion member of the Dow Jones industrial average is not even the best consumer staples stock around.

Now, before you shrug your head and shoulders, here are the numbers behind Procter & Gamble and another consumer staple that I have found to be a superior investment:

Data from Best Stocks Now Smartphone App

As you can see, Procter & Gamble has barely beat the S&P 500 over the last twelve months. This return also includes the 3.3% dividend that P&G pays.

Over the last three years, Procter & Gamble has barely outperformed the S&P 500. In fact, Procter & Gamble is slightly negative over the last three years.

Over the last five years, Procter & Gamble has outperformed the market. The stock has delivered an average total return of 3.5% per year, while the S&P 500 has delivered -1.4% per year.

Over the last ten years, P&G has beat the market quite handily, however. While the S&P 500 has been disappointing index investors with a paltry 1.8% total average return, P&G has dealt investors an average total return of 8.4%.

While on the surface, those returns seem to be pretty good, they don't even come close to what I look for in companies that I invest in. In fact, when I compare the returns of Procter & Gamble against 2,719 other stocks in the market, P&G only gets a C+ performance grade.

Now let's look at the performance of another consumer staple stock: Church & Dwight (NYSE:CHD), which is headquartered in Princeton, New Jersey, and is only a fraction of the size of Procter & Gamble. Church & Dwight is only $6.4 billion in market cap, but that is not necessarily a bad thing. In fact, I greatly favor small and mid cap stocks against their large or mega cap brethren in this market environment.

Big, lumbering large cap stocks like Intel, Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), General Electric (NYSE:GE), Pfizer (NYSE:PFE), etc., have been going nowhere for the last decade. Sorry, but I don't see any reason why we should expect these behemoths to suddenly start delivering the alpha we all so desperately seek. Yet, I continue to hear about these stocks of yesteryear on a daily basis in almost all of the major news outlets.

As soon as investors wake up to the fact that these stocks need a vibrant economy to make much progress, and switch their investments over to companies that are actually flourishing in a lousy economy, the better off they will be.

While Church & Dwight's brand lineup is not as impressive as Procter & Gamble's, it has assembled a pretty good portfolio so far. Assembling names like Aim Toothpaste, Arm & Hammer baking soda, Arrid Extra Dry, Cameo Soap, Nair hair removal, OxiClean, Pepsodent, and Trojan condoms, the company has been able to grow its earnings by an average of 18% per year over the last five years, while P&G has grown its earnings by only 7% per year. Also look for more good acquisitions to come form Church & Dwight.

This fact has translated into much better returns for Church & Dwight's shareholders, as opposed to Procter & Gamble's.

Data from Best Stocks Now Smartphone App

As you can see, Church & Dwight is up a whopping 39.7% over the last twelve months, while the S&P 500 is up just 7.0%. Remember, P&G was only up 7.8% during the same time period.

Over the last three years, CHD has delivered an average total return of 14.3% per year while the S&P 500 has been negative. By contrast, P&G also delivered a slightly negative return to its shareholders over the last three years.

Over the last five years, CHD has delivered a portfolio-pleasing average annual total return of 19.2% per year. Who would not be happy with that? The S&P 500 was negative during that same time period, while P&G was only delivering 3.5% per year to its investors.

Finally, over the last ten years CHD has delivered an average annual total return of 17.9% per year to its investors, while P&G delivered 8.4%, and the S&P 500 delivered a paltry 1.8% to those poor, beleaguered index investors.

Here is one more stat in Church & Dwight's favor: Remember 2008? (As investors, how can we forget?) The S&P 500 was down a gut-wrenching 38.5%. During the same year, P&G did quite a bit better than the market, down 13.8%. But Church & Dwight was up 4.4% that year.

If Procter & Gamble and Church & Dwight were mutual funds, which one would you invest in? While past performance is nice, investing is all about the future. The current consensus analyst's estimate for next year calls for Church & Dwight to earn $2.39 per share. The analyst's five-year earnings growth estimate is 11.4% per year. That seems reasonable given the fact that the company has been growing its earnings by 18% per year over the last five years.

At that rate, Church & Dwight would be earning $3.68 per share five years from now. Consider that the stock is currently trading at a PE ratio of 22. Also consider that over the last four quarters, the P/E ratio has ranged between 15 and 20. Lastly, let's look at the P/E history of Church & Dwight over the last ten years.

Avg P/E
2010-Dec 17.5
2009-Dec 16.1
2008-Dec 20.2
2007-Dec 19.8
2006-Dec 18.1
2005-Dec 19.4
2004-Dec 21.4
2003-Dec 17.3
2002-Dec 19.4
2001-Dec 21.4

Over the last ten years, Church & Dwight has averaged a 19.1 PE ratio. The P/E tends to drift higher during a weak market and lower during a strong market. This is the nature of consumer staples. They tend to outperform lousy markets and weak economies and underperform strong markets and strong economies.

I believe that we currently have a situation that fits the latter description of our current market and economy, as opposed to the former. I am using a multiple of 20 to come up with a five-year target price:

$3.68 X 20 = $73.62

By the way, I like five-year target prices much better than 3- to 6-month target prices. Its helps me keep my eyes focused on the road ahead rather than the ornament on my hood.

With Church & Dwight currently trading at about $44 per share, the stock still has about 75% upside potential over the next five years. Generally, I demand 100% or more upside potential, but with all of the wind currently behind the back of Church & Dwight and the lousy economy we are in, I believe this stock still fits a nicely in a well-diversified, fairly conservative portfolio.

I also always like to look at a chart before I consider a stock, and I check that chart every day after I buy a stock. Here is what a twelve-month chart of Church & Dwight looks like:

Just for fun, let's contrast Church & Dwight's powerful chart with Procter & Gamble's.

Procter & Gamble's chart is sideways and choppy at best. This fact is also reflected in its so-so performance over the last one and three years.

Finally, let's see how Church & Dwight stands up against the other 2,719 stocks in the market:

Data from Best Stocks Now Smartphone App

I only buy A- graded stocks or better. This represents about 8% of the overall market. CHD is currently my highest-ranked consumer staple stock. The stock currently is ranked 315 overall against the entire market. Next time you hear Jim Cramer gushing over Procter & Gamble's stock, as yourself why he is not talking about Church & Dwight instead!

As soon as investors accept the fact that the 30-month-old bull market ended in late July/early August of this year and focus their attention on companies that are flourishing in this weak enviroment, they will feel a breath of fresh air in their portfolios. For other ideas that fit this theme, check out my other recent articles.

Disclosure: I am long CHD.