Unlike other companies I have covered in previous articles, the name Church and Dwight (NYSE:CHD) doesn’t evoke the image of an exciting business. But the seemingly boring moniker obfuscates the work of a firm that has been around since 1846. Today the company produces some of the most well-known consumer products in the country. Maybe the name Church and Dwight doesn’t ring a bell, but Arm and Hammer baking soda, Trojan condoms, and OxiClean most certainly do. The company’s other brands include the following:
· XTRA discount laundry detergent
· Orajel toothache cream
· Nair hair removal
· Batiste dry shampoo
· First Response pregnancy tests
· Vitafusion and L’il Critters gummy vitamins
· Spinbrush electric toothbrushes
Church and Dwight has been part of my portfolio since I started investing as a teenager. In the years I have owned the stock, revenue and profit have grown pretty consistently and predictably. During that time, the equity outpaced the S&P 500. And over the last few decades the stock trounced the returns of the market as a whole. The global recession of the late 2000s barely registers on the performance chart.
Yet despite its outsized returns and portfolio of well-known brands, Church and Dwight remains relatively unknown to most investors. With a market capitalization of under $12 billion, the company is an order of magnitude smaller than multinational rivals P&G (NYSE:PG) and Unilever (NYSE:UN). For years the company remained uninvited to the major industry conferences and only joined the S&P 500 in late 2015.
Here I will review the company’s strengths and determine if the stock is still an attractive purchase.
The company touts the diversity of its portfolio, labeling 60 percent of products as “premium” and 40 percent as “value.” 80 percent of the company’s revenue comes from the previously listed ten product lines which it refers to as its “power brands.”
1. Arm and Hammer
Arm and Hammer is the largest single brand by far, accounting for 34 percent of total revenue, or $1.1 billion. Best known as the most popular baking soda brand in the country, the Arm and Hammer name now adorns an ever-growing line of products including detergent, toothpaste, deodorant, and cat litter. The company claims that Arm and Hammer brands can be found in 86 percent of U.S. households. Whenever someone discovers a new use for sodium bicarbonate, Church and Dwight wastes no time in developing and marketing a specialized form of its signature product.
In 2001 Church and Dwight acquired Carter-Wallace’s consumer products division, which included the Trojan condoms brand, for $739 million in a joint venture with private equity firm Kelso and Co. Three years later the company bought out Kelso’s stake for full ownership.
In retrospect this was a killer deal. The condom market is a growth industry both here and abroad. Although Reckitt Benckiser’s (RB.L) Durex brand dominates in Europe, Church and Dwight controls 70 percent of the U.S. market with the Trojan brand. Since annual condom sales in the U.S. are estimated at around $500 million, Trojan likely accounts for 10 percent of the company’s revenue with sales of $350 million.
I really like the “moat” provided by this business. Despite a strong push into the U.S., Reckitt Benckhiser failed to dent Trojan. And who could fault them? The consequences for sexual misadventure are a serious matter, so loyalty to a reliable brand should not come as a surprise. Unless science develops an equally cheap and foolproof contraceptive, I don’t see the market for condoms going away any time soon. Awareness of STDs is really sinking into the public consciousness, and we can expect to see more widespread family planning as the country becomes wealthier and more educated. Thus Trojan possesses both pricing power and guaranteed growth in volume.
3. OxiClean/Orange Glo
In 2006 the company acquired Orange Glo International for $325 million, which at the time reported $300 million in revenue. Orange Glo is best known for its cleaning products OxiClean, Orange Glo, and Kaboom, as well as its charismatic pitchman Billy Mays. Church and Dwight put the brand into overdrive by expanding into other major household cleaning categories such as laundry and dishwashing.
Without any publicly available information, we don’t know how much revenue the Orange Glo subsidiary generates today. During its heyday it was growing at 20 percent a year, but it probably has not surpassed the Arm and Hammer brand. So assuming growth slowed to 10 percent for five years and then 5 percent thereafter, the segment could theoretically generate about $600 million in the present day. I think that is pretty reasonable given the effort the company put into turbocharging the OxiClean name.
4. Avid Health
In 2012 Church and Dwight made its largest acquisition ever with a $650 million deal to buy the maker of Vitafusion and L’il Critters gummy vitamins. At the time Avid reported $200 million in revenue, which would account for 6 percent of the company’s total sales today (assuming no growth). In retrospect, this price might have been a bit steep. Church and Dwight has admitted that growth has come in below expectations amid operational difficulties.
So far this estimation has accounted for about 70 percent of Church and Dwight’s revenue. To recap:
Arm and Hammer: $1.2 billion (34%)
Orange Glo/OxiClean: $600 million (21%)
Trojan Condoms: $350 million (10%)
Avid Health: $200 million (6%)
One major criticism leveled against the “buy” case is that Church and Dwight lacks pricing power. Much of the company’s revenue growth comes from volume, not price increase. P&G’s renewed focus on its strongest brands is thought to be behind the lethargic growth of other consumer products companies, and the behemoth could eventually put pressure on Church and Dwight. Headwinds in the household cleaning aisle, where competition based on price is fierce, are also likely to impact Church and Dwight’s revenue going forward. At 27 times earnings, the company would have to continue growing earnings at a double digit rate to justify its valuation. Many analysts, perhaps reasonably, don’t think that will happen.
Nevertheless, the market seems confident in Church and Dwight’s prospects for growth and acquisition prowess. The company boasts a stellar track record for making good deals. Church and Dwight doesn’t throw away its ample cash hoard on acquisitions with the vague promise of future “synergies.” Instead the company looks for smaller firms that it can acquire at a fair price and then expand into major brands. So far this strategy has proven very successful. The company is a cash machine and maintains a strong balance sheet, so there is always dry powder for another deal.
Occasionally Church and Dwight itself is mentioned as a good candidate for acquisition. Last year there was talk that Reckitt Benckhiser planned to offer $23 billion for Church and Dwight, double the latter’s market capitalization. Church and Dwight flatly denied the rumors. Even so, I believe that one day this may become a reality, given Church and Dwight’s small size relative to its competitors.
But for now let’s just concentrate on the present situation and not speculate about acquisitions. If P&G gets its act together and mounts a serious assault on the laundry aisle, then Church and Dwight could be in trouble. It will keep growing, but perhaps not at a double digit clip. That said, I think the analysts who say that Church and Dwight has no economic moat are just plain wrong. Products like Trojan condoms and Arm and Hammer baking soda possess overwhelming brand dominance, which the company has leveraged extremely well
Although Church and Dwight continues international expansion efforts, the U.S. market still accounts for 85 percent of sales. It isn’t a big player in hot emerging markets, but there is a lot of room for expansion. And in the meantime, its sales tend to be predictable in America’s mature economy. Personally I prefer investing in companies that do most of their business in the U.S. It is just too difficult for me to assess a firm’s prospects in a foreign market that I know little about.
At the end of the day, I would still prefer to own Church and Dwight over most stocks. I have never lost a night’s sleep over this investment. Indeed, whenever the market is in turmoil I just think of millions of men having sex while wearing Trojan condoms. No matter what Donald Trump does or what the interest rate is, people will still do laundry, get pregnant, and buy cat litter.
At the time I bought in, the firm traded between 21 and 24 times earnings. I probably wouldn’t be a buyer at current levels, but would consider adding to my position if I could get a 20 percent discount.