Dad, Don't Buy Church & Dwight

| About: Church & (CHD)

When I told my father I was going to write articles for Seeking Alpha, he promptly gave me a list of stocks he's been following. He's one of those cautious investors who take approximately forever to decide to establish a new position. So Dad, here's hoping to help you along.

The first stock on Dad's list is Church & Dwight (NYSE:CHD). Honestly, at this point, I've never even heard of the company. Guess that's what research is all about.

Church & Dwight, for the uninformed like me, is a company in the consumer goods sector, specifically the cleaning products industry, and is probably better known by its brands: Arm & Hammer, Oxiclean laundry products, Nair hair removal products, Orajel pain relievers, and Trojan condoms. Competitors include Procter & Gamble (NYSE:PG) and Clorox (NYSE:CLX).

Analyst opinion on the company is middle-of-the-road, with 3 Strong Buys, 2 Buys, 10 Holds, and 3 Underperforms. Mean opinion is a 2.6 (1.0 Strong Buy, 5.0 Sell) and mean target price is $51.50, lower than the current price of $52.97, which also happens to be a new 52-week high.

Earnings released on Friday, May 4, were good, with EPS at $0.66 beating the consensus of $0.61 by 8%. Note also that this was 14% higher than the previous quarter, and that the company does have a history of beating estimates for three previous quarters.

The analyst estimate of annual growth rates for the next 5 years is 10.4%, which is lower than both the industry (12.7%) and the sector (13.4%). Current dividend yield is 1.9%. The company's current PE is 21.7, which is quite high for a stodgy packaged-goods company, and is 20% higher than the sector (18.3) and 30% higher than the industry (16.7).

Competitor Procter & Gamble was downgraded on 5/7 by Wells Fargo, from Outperform to Market Perform. The analyst, Timothy Condor, cited market share concerns. P&G annual growth over the next 5 years is estimated at 7.4%, with a current PE of 16.7 and a 3.5% dividend yield. P&G's stock price is down 2% from last year.

Annual growth rate for rival Clorox is estimated at 10.1% over the next 5 years, dividend yield is 3.6% and PE is 16.8. Clorox stock is +2% from this time last year.

During the Church & Dwight conference call on Friday, Chairman and CEO Jim Craigie explained the company's focus on its 8 "power brands," from which come 80% of its sales and profits. He outlined a strategy to devote a significant portion of upcoming marketing dollars and new production introductions to those brands during the next year.

Craigie detailed the company's Factors of Success, saying, "All these factors give me great confidence in our ability to deliver our aggressive 2012 business targets despite a very tough business environment facing all companies these days."

  • ferociously defending brands against competition
  • strong growth in international business
  • long history of expanding margins
  • tightly manage overhead costs - the company has the highest revenue per employee of any major Consumer Packages company
  • strong record of free cash flow conversion

Indeed, the company has done very well during the economic slowdown, in part because 40% of their revenues are derived from "value" brands. Switching to these products from more expensive premium brands is sensible in these tough economic times, but the company is finding that consumers are staying with the bargain brands even as the economy improves.

Increasing commodity prices have been reducing margins, but the company stated that cost savings will outpace commodity price increases as the year continues.

In conclusion, I like the company's A+ financial strength, its stable of well-known name brand consumer products available worldwide, and its history of beating the competition. However, the possible upside of only 10% growth concerns me. Church & Dwight would also have to maintain a PE that is considerably higher than its competitors.

Dad, I think there are better opportunities out there. Don't buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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