Church & Dwight Unsustainable Growth Strategy Will Cause Problems For Shareholders

Summary

• Church & Dwight's growth through acquisitions has been taken to the extremes, without properly integrating newly acquired brands.
• There are also many red flags when examining CHD's accounts in further detail.
• Many of the newly acquired businesses rely heavily on overall product category growth, offering little to no competitive advantages.
• Risks associated with investing in consumer staples could trigger the avalanche of problems described above.

Investment thesis

Source: benchmarkcorporate.com

As interest rates hit rock bottom and risk of recession looms, valuations in the consumer staples sector are at all-time high. Although the inverse relationship between interest rates and valuations is not surprising, extremely low interest rates also act as an incentive for companies in slow-growth industries to look for consolidation.

Church & Dwight (NYSE:CHD) is one of the companies in the sector that has taken this strategy to the extreme. By not properly integrating its newly acquired businesses, paying hefty premiums and planning to continue spending heavily on acquisitions, CHD growth strategy relies heavily on new acquisitions.

Usually, a too aggressive growth strategy through M&A deals does not by itself support a short thesis, but in the case of CHD, there are a number of other red flags. CHD's spectacular free cash flow growth has been achieved on the back of low capital expenditures, aggressive working capital practices, and falling asset turnover and marketing spend relative to sales.

Finally, the company's M&A strategy seems purely short-term oriented while synergies and proper business integration are taking the back seat. Many of the highly priced recent acquisitions rely on higher penetration of whole product categories and do not offer any significant competitive advantages that would allow CHD to retain its long-term market share.

Source: churchdwight.com

As a result of all that, CHD would most likely significantly under-perform the consumer staples sector. Since CHD's flawed strategy relies heavily on low interest rates, which are now headed towards zero, there is a short-term risk involved for short sellers as the company might see a temporary boost from the loose monetary policy. Therefore, for the time being, the best way to take advantage of CHD's mispricing would be a long/short strategy alongside the best-in-class consumer staple companies, such as Clorox (

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.