Company Overview: Church & Dwight Company, Inc. (NYSE: CHD) was founded in 1846 and is engaged in the manufacturing, development, and marketing of a wide range of household, personal care, and specialty products. The company is one of the top providers of sodium bicarbonate, commonly known as baking soda in the US market. The company operates its business in six countries namely Canada, U.K, Mexico, France, Brazil, and Australia. The company’s products are exported to more than 90 other countries worldwide. The company’s business is divided into three main segments, namely (1) Consumer Domestic, (2) Consumer International and (3) Specialty Products.

CHD Details

Strong Product Adoption & Brand Acquisitions to Support the Overall Growth: Church & Dwight Company, Inc. (NYSE: CHD) is a foremost U.S. producer of sodium bicarbonate, widely recognized as baking soda, an ordinary product that cleans, leavens deodorize, and buffers. The company manufactures, develops, and markets a variety of household, personal care, and specialty products. The company has 13 power brands, namely ARM & HAMMER, Zicam, Trojan, Spinbrush, First Response, OxiClean, Orajel, Xtra, L’IL CRITTERS and VITAFUSION, Waterpik, Batiste, FLAWLESS and Nair. It is worth mentioning that in 2001, the company bought 12 out of 13 power brands and added to its portfolio.

While the COVID-19 induced uncertainties were causing hassles in several industries, many cleaning products companies remained on a safe and bright side. CHD is one of the cleaning products companies which gained from favourable market conditions. During the pandemic, maintaining good hygiene remained the utmost priority of customers. This, in turn, aided the demand for such products tremendously and is expected to continue in FY21 and beyond. These ever-rising demand and robust e-commerce sales are expected to aid CHD in the upcoming periods.

The company is working with retail suppliers & associates to safeguard a smooth supply chain and boost the higher demand. Moreover, the trend to maintain social distancing spurred the demand for the company’s online sales. For FY20, online sales contributed nearly 13% to total sales as compared to only 8% in FY19. This apart, the company’s regular innovation is a growth driver. CHD has recently unveiled new gummy vitamin products namely Organic Prenatal Multi, Apple Cider Vinegar, Triple Immune Power, and IRRESISTIBLE SKIN under the VITAFUSION banner, which are expected to aid the top-line, going forward.

12 Power Brands (Source: Company Reports)

Looking at the past performance, CHD delivered a CAGR of ~7.4% and ~12.8% in revenues and earnings per share, respectively, over the period of FY17-FY19. The company is focused on enhancing its market position and bolstering its product portfolio. In doing so, the company remains on track to invest in technologies and products along with new and innovative launches to enhance value to the customers. The new product unveils are likely to contribute to its volumes in the days ahead.

Revenues & EPS Trend Highlights (Source: Company Reports)

4QFY20 Results Highlights: During the quarter, the company reported adjusted earnings per share of 53 cents. Reported earnings per share stood at 59 cents, up from 58 cents reported in the year-ago period. Net sales in 4QFY20 soared 13.2% year over year and stood at $1,295.3 million, owing to continued strength in brand consumption. CHD also witnessed a double-digit consumption increases in numerous domestic categories, especially pregnancy test kits, gummy vitamins, and baking soda. Despite coronavirus led pandemic, CHD’s international business stayed strong and witnessed wide-based consumption surge across several countries and brands. During the quarter, organic sales went up by 10.8%, and supposed the management guidance of 8% growth. Gross margins for the quarter, however, stood at 43%, down 280 basis points (bps) year over year, owing to higher manufacturing costs, awards to supply-chain workers and higher tariffs. As the company took necessary measures to improve its brands, CHD witnessed a 24% increase in its marketing expenses.

Key Results Highlights (Source: Company Reports)

Segmental Highlights: Net sales from Consumer Domestic stood at $990.9 million, up 13.8% year over year, due to increased personal care and household, along with acquisition synergies. Net sales from Consumer International came in at $228.5 million, depicting a rise of 16.2% year over year. Organic sales soared 14.9% due to higher volumes and a favourable price mix. Specialty Products sales, however, declined 1.2% to $75.9 million, owing to the non-dairy segment.

(In Millions)

 Segmental Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 35.32% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 11.52% and 5.82%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Liquidity & Balance Sheet Details: The company ended FY20 with cash balance of $183.1 million. Total debt amounted to $2,163.9 million at the end of FY20. The company reported cash flow from operating activities of $990.3 million in FY20. Capital expenditures for the period amounted to $98.9 million. During the quarter, the company declared a regular dividend of 25.25 cents per share, an increase of 5.2% on a year over year basis, depicting a 25th consecutive year of a dividend rise. The hiked dividend is payable on March 1, 2021. Also, the company entered into a share buyback program with a commercial bank to buy shares worth $300 million. These measures indicate CHD’s strong cash flows along with a commitment to enhance its shareholders' value. For FY20, EBITDA and net margin stood at 24.9% and 16.1%, higher than the industry median of 21.2% and 13.1%, respectively. In FY20, debt to equity stood at 0.72x, lower than the FY19 figure of 0.77x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Risk Analysis: The company expects a decline in gross margins along with higher marketing expenses in the days ahead, given its brand enhances strategies. This might weigh on the bottom-line performance in the coming quarter. For 1QFY21, the company expects adjusted earnings per share to be 80 cents, down 4% year over year, owing to higher marketing spend to boost product introductions. Further, stiff competition from peers and a leveraged balance sheet add to the woes.

Outlook: The company predicts to begin 2021 with a kick start and expects a number of categories to witness high consumption, such as cat litter, gummy vitamins, hair growth supplements and laundry additives. Also, the company remains confident regarding its FY21 product releases in many categories, which is expected to aid growth, going forward. The company has also been investing worldwide and expects its Specialty Products business to deliver a strong FY21 year, owing to balanced dairy and non-dairy businesses.

For FY21, the company expects an increase in sales to approximately be 4.5% in FY21, while organic sales are likely to increase 3% year over year. Gross margin in FY21 is predicted to rise 50 bps. Marketing costs are expected to increase rise in dollar terms, while the same is expected to decline 30 bps as a percentage of sales. For FY21, adjusted operating margin is predicted to increase 100 bps, whereas adjusted earnings per share is expected to be in the range of $3-$3.06, depicting a rise of 6-8%. Coming to 1QFY21, CHD expects sales to rise ~3% year over year. Organic sales are expected to increase by ~2% in 1QFY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, the stock went down by ~14.1%. The stock made a 52-week low and high of $47.98 and $98.96, respectively. On the technical analysis front, the stock has a support level of ~$81.09 and a resistance level of ~$89.99. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer average, considering its synergies from brand acquisitions, geographical diversification, decent Q4FY20 and FY20 performance, and encouraging FY21 view. We have taken peers like Clorox Co (NYSE: CLX), Colgate-Palmolive Co (NYSE: CL), to name few.  Considering the company’s track record of enhancing shareholder’s value, decent 4QFY20 performance, acquisition synergies, encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $82.76, up by 1.33% on 17 February 2021.  

CHD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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