Why Church & Dwight Seems Like An Attractive Acquisition Opportunity?

(RTTNews) - This consumer goods maker has delivered over 10% EPS growth per year for each of the past 13 years, a result that only a few companies in the S&P 500 have achieved. The company is relying on its portfolio of value and premium products, new products launch, aggressive productivity programs and tight cost management to continue to boost its top-line and bottom-line.

The Stock In Focus...

Church & Dwight Co. Inc. (CHD) develops, manufactures and markets a broad range of household, personal care and specialty products. Its ARM & HAMMER brand is one of the nation's most trusted trademarks for a broad range of consumer and specialty products developed from the base of bicarbonate and related technologies.

The company's consumer products business is organized into two segments: Consumer Domestic, which encompasses both household and personal care products, representing about 75% of total sales in 2013 and in the first nine months of 2014.

The next segment, Consumer International, primarily consists of personal care products, and represented 17% of total sales in 2013 and 16% in the first nine months of 2014.

Church & Dwight's third business segment is Specialty Products Division or SPD, a leader in specialty inorganic chemicals, animal nutrition, and specialty cleaners.

Brands & Products

The company has nine key brands representing about 80% of its consumer sales. These so-called "power brands" include ARM & HAMMER, TROJAN, OXICLEAN, SPINBRUSH, FIRST RESPONSE, NAIR, ORAJEL, XTRA and VMS.

About 40% of the company's domestic consumer products are sold under the ARM & HAMMER brand name and derivatives. The remaining eight power brands have all been added to the company's portfolio through several acquisitions, since 2001.

Customer Concentration & Sales

U.S. is the single largest geography, which generates about 80% of sales for the company. Other than the U.S., no one country accounts for more than 7% of consolidated net sales.

Wal-Mart has been the single largest customer accounting for 24% of net sales in 2013, and 2012, and 23% in 2011.

Strong Total Shareholder Return or TSR

Over the past decade, Church & Dwight delivered an annual TSR of about 16%, significantly better than the 3% TSR of the S&P 500 stock index during the same period. In 2013, the company achieved a TSR of 26%.

Key initiatives -- the "secret sauce" to success...

1) Recession-Resistant Product Portfolio - Church & Dwight's diverse consumer product portfolio, consisting of both premium (55%) and value (45%) brands, enables it to succeed in various economic environments.

2) Brand Value - While the company sells over 80 brands, nine of these brands are considered "Power Brands." Four of the nine Power Brands generate over 60% of its revenues and profits. These four brands, which the company call its "Mega Brands," are ARM & HAMMER, TROJAN, OXICLEAN and vitamins (L'IL CRITTERS and VITAFUSION).

Mega Brands

ARM & HAMMER - offers a portfolio of personal care products with the power of baking soda. Personal care products include Toothpaste & Whitening Systems, Antiperspirants & Deodorants, Nasal Care, Wound Care & Eye Care, Adult Toothbrushes, and Kid's Toothbrushes.

OXICLEAN - offers a wide range of products categorized under Laundry, Versatile Stain Removers, In-Wash Stain Removers, Pre-Treatment, Dishwashing.

TROJAN - Trojan Brand Condoms are America's #1 condom. The products including Magnum, Stimulations, Pleasures, Her Pleasure, Sensitivity, ENZ, Vibrations, and Lubricants are electronically tested to help ensure reliability. There are over 30 varieties of Trojan Brand Condoms.

Vitamins (L'IL CRITTERS & VITAFUSION) - Church & Dwight covers the full spectrum of dietary supplements for adults and children with the vitafusion and L'il Critters family of gummy vitamin brands.

In October 2012, Church & Dwight Co. purchased Avid Health Inc., acquiring leading brands in the gummy vitamin industry including: vitafusion, L'il Critters, as well as the probiotics brand accuflora.

3) International Growth - Over the past 13 years, the company has transformed itself from an almost totally U.S. business to a global player with about 17% of its sales from foreign countries. It has fully operational subsidiaries in six countries - Canada, Mexico, U.K., France, Australia and Brazil - and exports to over 90 other countries. The company's Consumer International team has delivered outstanding growth over the past five years with Net Sales increases averaging over 5% annually and Operating Profit increases averaging over 12% annually.

3) Gross Margin expansion - Despite strong competitive pressure and fluctuating commodity costs, the gross margin of its business expanded 80 basis points in 2013. This improvement builds upon the 1,510 basis point gross margin increase achieved between 2001 and 2012. The company drives higher gross margin through productivity improvements, launching higher margin new products and buying margin accretive businesses. Gross margin expansion fuels Church & Dwight's growth as it enables the company to increase marketing spending

4) Cost Management - Maintaining tight controls on its overhead costs has been a hallmark of Church & Dwight. Since 2006, the company has increased revenues by 64% or $1.2 billion and lowered its overhead costs as a percentage of revenue from 15.0% to 13.0%. Hence, the company believes it has the highest revenue per employee compared to any major consumer packaged goods company.

5) Growth Through Acquisitions - The company has very clear acquisition guidelines and it seeks margin-accretive businesses. It quickly integrates its acquisitions to leverage its existing capital base in manufacturing, logistics and purchasing.

As recently as this week, the company agreed to acquire the assets of VI-COR, a manufacturer and seller of feed ingredients for dairy cows, beef cattle, poultry and other livestock, located in Mason City, Iowa, generating annual sales of about $25 million.

The VI-COR products are yeast-based feed ingredients for improving livestock digestive health and performance, which complements Church & Dwight's existing dairy nutrition business. Church & Dwight believes that the acquired business has growth potential, and is expected to be gross margin accretive to the company.

The acquisition was financed with debt and is expected to be earnings neutral in 2014 and slightly accretive to earnings per share in 2015.

On September 19, 2014, the company completed the acquisition of certain women health care brands, including REPHRESH and REPLENS from Lil' Drug Store Products Inc. The acquisition was structured as an asset purchase resulting in a cash tax benefit of $55 million (NPV) from intangible amortization. The acquisition was financed with debt and is expected to be earnings neutral in 2014 and about $0.02 accretive to reported earnings per share in 2015 and $0.06 accretive to cash earnings per share, which excludes non-cash expenses.

In October of 2012, it acquired Avid Health Inc., a leader in the fast growing gummy vitamin category for children and adults. It quickly integrated the Avid Health business in 2013, achieving meaningful earnings accretion.

6) Superior Free Cash Flow Conversion - Over the past 10 years, the company's annual free cash flow has increased by over $269 million, enabling the company to lead the consumer packaged goods industry by consistently converting over 100% of net income into free cash flow.

Over the next 3 years, Church & Dwight anticipates generating over $1.5 billion in free cash flow, which will enable it to aggressively pursue acquisitions, make capital investments to continue to support the profitable growth of existing businesses, and return cash to its shareholders.

The company has consistently paid a quarterly dividend since 1902, and increased its annual dividend by 11% in 2014 to a current yield of about 2%, representing a 439% increase in its annual dividend since 2009.

Looking Ahead...

For the fourth quarter, Church & Dwight expects earnings to be $0.78 per share, representing a 20% increase over the year-ago period, and organic sales growth of about 3%t. The company expects its gross margin to expand amid a relatively normalized promotional environment.

Wall Street analysts expect the company to report earnings of $0.82 per share for the quarter on revenues of $853.56 million.

For fiscal 2014, Church & Dwight tightened its earnings growth to 8% or $3.01 per share from the prior estimate range of 7% - 9% growth. The company continues to expect organic sales growth for the year to be about 3% and gross margin to be about 75 basis points lower than last year.

Street expects the company to report earnings of $3.02 per share on revenues of $3.27 billion for 2014.

For fiscal 2015, the company projects high single digit earnings per share growth, which is top tier within the consumer packaged goods industry, inclusive of foreign exchange headwinds. According to the company, 2015 will mark the second year of its quest to establish Oxiclean as its next megabrand.

Analysts expect earnings of $3.32 per share for the year 2015.

Latest Q3 Results

Amid fierce competition and soft consumer demand, the company reported upbeat results for the third quarter.

The company's third-quarter net income increased to $115.9 million or $0.85 per share from $107.9 million or $0.76 per share in the year-ago period.

On average, twenty analysts polled by Thomson-Reuters expected the company to report earnings of $0.82 per share for the quarter. Analysts' estimates typically exclude certain special items.

Net sales for the quarter grew 5% to $841.8 million from $804.8 million in the same period of last year. Analysts had a consensus revenue estimate of $828.76 million for the quarter.

Organic sales growth for the quarter was 4.7%, driven by volume growth of 5.2%. This was partially offset by 0.5% unfavorable product mix and pricing.

Total Consumer segment net sales for the quarter improved 3% from the prior-year period to $763.4 million, while Specialty Products net sales grew 21% to $78.4 million. Household Products sales rose 3% to $379.5 million and Personal Care Products sales increased 5% to $247.7 million.

Meanwhile, the company's gross margin contracted 170 basis points to 43.7%, as expected by the company, primarily reflecting higher trade spending and commodity costs.

James Craigie, Chairman and Chief Executive Officer of Church & Dwight, said:

"We are pleased with the sales and earnings growth. In early 2014, we launched innovative new products in every one of our major categories and in three new categories as we believe that innovation is the key to increasing our market share and reviving category growth in this challenging economy."

YTD Highlights

The company reported net income of $307.3 million or $2.23 per share for the nine months ended September 30, 2014 compared to $302.2 million or $2.14 per share in the prior year period.

Net sales rose to $2.43 billion from $2.37 billion generated a year ago.

Five-Year Financial Review

Net income for fiscal 2013 was $394.4 million or $2.79 per share compared to $349.8 million or $2.45 per share in 2012, $309.6 million or $2.12 per share in 2011, $270.7 million or $1.87 per share in 2010, and $243.5 million or $1.70 per share in 2009.

Net sales increased to $3.19 billion in 2013 from $2.92 billion in 2012, $2.74 billion in 2011, $2.58 billion in 2010, and $2.52 billion in 2009.

Summing Up...

The company has charted a proven strategy for growth through acquisitions. It even seems well-positioned to be an attractive takeover target itself for bigger conglomerates, because of its consistent growth, brand value, cost containment, international growth and sound financials.

Only time will tell!