Church and Dwight (CHD)

A quick discussion of Church and Dwight.

Church and Dwight

Company’s business is in consumer products and competes with Colgate-Palmolive, Procter and Gamble, and Clorox, to name a few.

Company was founded in 1846 and develops, manufactures, and markets a broad range of household, personal care, and specialty products.

CHD focuses its marketing efforts on its 8 “power” brands:

These brands are as follows:

1. Arm & Hammer
2. Trojan Condoms
3. XTRA Laundry detergent
4. OXI Clean
5. NAIR
6. First Response pregnancy tests
7. ORAJEL
8. Spinbrush battery-operated toothbrushes

The company has 3 primary businesses:

1. Consumer Domestic
2. Consumer International
3. Specialty products

The consumer domestic business represents, as of 2009, 74% of company’s sales

This segment has the 8 “power” brands mentioned above.

The Consumer International business represents, 2009, 16% of company’s overall sales.

This segment sells internationally personal care products, some of the same as mentioned above.

The International mkts include Canada, 36% of segments sales, France, 20% of segments sales,

UK, 16% of segments sales, Mexico, Australia, Brazil, and China

The Specialty Products business sells inorganic chemicals for industrial, institutional, medical, and food applications. Sales also include animal nutrition and specialty cleaning products.

In 2009, household products were 64% of consumer domestic sales and 47% of cos. Total sales. Household products include Arm & Hammer baking soda, Arm & Hammer Carpet and Room Deodorizers, SNO BOL toilet bowl cleaner. Orange Glo and OXI Clean

In 2009, personal care constituted approx. 36% of consumer domestic sales and 27% of company’s total sales. Products in personal care include Arm & Hammer toothpastes, AIM toothpaste, Close-UP toothpaste, Spinbrush battery operated toothbrushes, Arm & Hammer deodorants, ARRID antiperspirants, TROJAN condoms, NATURAL LAMB condoms, and NAIR.

Somethings to like about this company:

The ARM & HAMMER name. This trademark was adopted in 1867 and this baking soda brand remains the leading brand of baking soda in terms of consumer recognition of the brand name and reputation for quality and value.

The ARM & HAMMER brand is very well known, and is a very strong brand. They market several products using this brand name.

In 2009, Spinbrush was the #1 brand of battery operated toothbrush.

In 2009, First Response was #1 in home pregnancy and ovulation test kits.

OXI-Clean is the #1 brand in the laundry pre-wash additives market in the U.S.

Many recognizable brand names in US and overseas, AIM, Close-UP, NAIR, ORAJEL, strong product recognition.

Company continues to increase sales revenue year over year:

2005-2006 increase 12.05%

2006-2007 increase 14.14%

2007-2008 increase 9.07%

2008-2009 increase 4.07%

Gross margin increasing year over year as well:

2007 gross margins: 39%

2008 gross margins: 40%

2009 gross margins: 43%

Company did a great job in weathering the storm of 2007-2008 and the recession fears.

They did this by efficient cost cutting.

The company’s brands are usually value brands and sell at a discount to other well-known brand names. Great in economic climate of today

Risks:

Because of the competitive environment facing retailers, The company faces pricing pressure from customers, particularly the high-volume retail store customer, who continue seeking to obtain pricing concessions or better trade terms. This could reduce the company’s margins.

The company competes in oral and personal care and in the deodorant market. These are highly competitive markets and highly innovative markets, with a continuous flow of new products. The company must continue to spend on R&D to develop new and innovative products.

The company’s value-priced products are always subject to fierce price competition. There may be times where the company has to reduce prices to remain competitive and retain market share. This can reduce margins.

The company’s sales are driven domestically. In fact, for the past 7 years, domestic sales have accounted for over 70% of the company’s revenues. The domestic market is heavily penetrated and highly competitive. I am nervous that the company is in such a heavily penetrated market especially in this economic environment. Heavy discounting from competitors or increased sales of private label brands could hurt revenue of CHD.

I would be happy to see the company develop strategy to increase international market share. Up to 2009, CHD international mkt share has never increased beyond 18%. The company should develop this market further as the domestic market continues to mature and become fully penetrated.

Wal-Mart accounts for 22% of net sales. If the company were to lose a large number of sales to Wal-Mart their sales revenue and profitability would be adversely affected.

Ratios and numbers:

2009 Return on Invested Capital: 11.87%

2008 Return on Invested capital: 11.16%

2009 Return on Equity: 16.08%

2008 Return on Equity: 15.53%

2009 Profit Margin: 10.85%

2008 Profit Margin: 9.62%

Research and Development spending:

2009: $55.1 million

2008: $51.2 million

2007: $49.8 million

2009 Total Debt: $816 million

Interest expense

2009: $35.568 million

2008: $46.945 million

Times interest earned (EBIT/Interest Expense)

2009: 13.78

2008: 9.01

2007: 6.28

More than enough earning before interest and taxes to cover interest

Current ratio (Current assets/current liabilities):

2009: 1.6371

2008: 1.7181

My calculated Free Cash Flow:

2009: 18.686 million*

2008: 319.34 million

2007: 115.363 million

*due to a huge increase in operating cash

Weighted Average Cost of Capital:

My calculation gives WACC of 4%

From above, Return on Invested Capital is 11.87%

Company is returning 7.87% above it’s cost of capital

This is very appealing to me. If the company can maintain this spread, or even increase it by repaying debt, then I think the company can continue to increase shareholder value.

I have valued this company using historical data currently available.

I have model the cash flows into the future using a conservative growth rate of 3.5%.

I have used 2 different discount rates to discount the cash flows.

Using my model I have determined the stock has a fair value price of between $63.66 and $70.

The current price of CHD stock is $69.88

The stock appears to be fully valued according to my model.

I do like this stock and the prospects. Strong brand name and brand recognition go a long way. I think they do need to execute an international strategy to begin stronger penetration into that market.

The company also pays an annual dividend of $.68, a 1% yield.

I would look to buy this stock between $52.5-$55 per share