Checking Up on Church & Dwight (CHD)

– Church & Dwight (CHD) is a mid-sized manufacturer of household products, some 35% of which are sold under its Arm & Hammer brand (baking soda, laundry detergent, carpet cleaner, toothpaste, cat litter).  CHD also makes Brillo scouring pads. 

– Acquisitions in the last ten years have added other major brands: in 2001, Arrid antiperspirants, Trojan condoms, Nair depilatories, and First Response pregnancy tests; in 2003, Mentadent, Pepsodent and Aim toothpastes; in 2006, Qxi Clean, Kaboom, and Orange Glo household cleaners; and in 2008, Orajel oral analgesics. 

– To fund these acquisitions, CHD’s Long-Term Debt increased from $20.1M in 2000, to $406.6M in 2001, to $754.7M in 2005, to $835.5M as of 9-30-09 according to Value Line. 

Does CHD Have Too Much Debt? 

– With S&P data, TK 6 shows Total Debt currently at $816.3 M ($781.4M long-term), a Debt to Total Capital Ratio of 37.9%, and a 2008 Debt to Equity Ratio of 58.7%.  Can CHD safely manage its debt, here’s what I uncovered: 

– CHD’s 2008 Annual Report: 

** CHD must satisfy two ratios imposed by the company’s primary creditor: an Interest Coverage Ratio [defined, see note A below] that was 9.8 for 2008 and better than the minimum 3.0 permitted, and a Leverage Ratio [B] that was 1.9 and also better than the maximum 3.5 allowed (2008 A.R., PDF page 51). 

** CHD generated $336M Cash from Operations last year and, after capital expenditures, had $238M of Free Cash Flow (PDF page 5).

– The one-click Annual Report spreadsheet by Bob Adams:  

** The Long Term Debt to Equity Ratio [C] from the latest A.R. was 37% and gets a red flag warning as it may be excessive.  The spreadsheet explains that a normal LT Debt/Equity Ratio should be under 25%; 

** It also shows that LT Debt decreased by 24% in 2008, which is good, but that Debt/Equity is still high; 

** Cash Flow Growth [D] is up 19% and is very good; Free Cash Flow Margin [E] is 9%, but the spreadsheet wants 10% minimum

** Total Interest Coverage [F] is not available because there is an error by MSN, the spreadsheet’s data source;

### You can get a link to this free, easy to use spreadsheet and an explanation of its many features by going to my Favorite Links page, click here.

– Value Line: 

** VL shows the amount of Total and LT Debt as of 9-30-09 with LT interest at $30.0M and Total Interest Coverage at 10.6x; 

** VL estimates that LT Debt will decrease from $835.5M to $400M in the next 3-5 years which I think is a positive sign. 

– Morningstar: 

 ** The narrative report says that LT Debt more than doubled between 2003 and 2008 in order to fund acquisitions; 

** Morningstar is not “overly concerned” about CHD’s ability to service its debt given its cash flow and that its interest coverage ratio was more than 11x through the first half of 2009. 

Company Background: 

– CHD is organized into three segments: Consumer Domestics (71% of 2008 sales); Consumer International (17%); and Specialty Products (12%). 

– CHD has 8 major brands (Arm & Hammer, Trojan, Oxy Clean, Spinbrush, First Response, Nair, Orajel, and Xtra) which account for 80% of its sales and profits.   

– Wal-Mart is its largest customer representing 22% of its annual sales. 

– CHD’s 2008 Annual report says that its Total Return to shareholders (appreciation plus dividends) has been close to 18% annually for the last 10 years. 

– Close or direct competitors are Clorox (CLX), Proctor & Gamble (PG) and Sun Products (private) according to Yahoo Finance and Hoovers.com. 

SSG Discussion: 

– The following table compares KamieZ’s SSG, which I got from BI’s First Cut page, with two of mine and with Take Stock.  Armin-1 uses the same basic data as Kamie, but with my judgments.  Armin-2 uses current data, including a later Quarter that was reported after Kamie did her SSG, and my same judgments. 

– Kamie Zaracki is the new CEO of Better Investing and I think it’s terrific that she makes her SSG available to all BI members.  Here’s hoping for many more and her bio is also available: click here .

Church & Dwight (CHD)	KamieZ	Armin-1	Armin-2	Take Stock
Date	2-5-10	Same	2-19-10	Same
Data	S&P	Same	Same	Morningstar-Hemscott
Price	$61.10	Same	$65.90	Same
52 week High & Low Price	$64.09 & $45.41	Same	$65.92 & Same	Not Available
Last Quarter of        Reported Data	Q3 ending            9-30-09	Q3 ending        9-30-09	Q4 ending       12-31-09	Q3 ending           9-30-09
Software Used	TK 6	Same	Same	TS Online
Project Growth From End of	Last FY	Last Q	Same	Last FY
Sales Growth	8.00%	10.00%	Same	8.70%
EPS Growth	8.00%                   (PP = 8.9%)	10.00%	Same	5.98%
High PE	19.0	17.0	Same	21.6
High EPS	$4.28	$5.69	$5.85	$3.67
High Price	$81.30	$96.70	$99.40	$79.07
Value Line Estimated High Price = $75-95 as of 1-1-10
Low PE	15.0	12.5	Same	14.8
Low EPS	$2.91                   (last FY)	$3.53                   (TTM)	Same	$2.92
Low Price	$42.40                  (recent                severe low)	$45.40               (low PE x          low EPS)	Same	$43.22               (low PE x           low EPS)
Upside/Down	1.1	2.1	1.6	0.58 (implied)
Total Return	6.5%	10.3%	9.3%	4.2%
SSG Buy Under	N/A	$49.60	$50.99	$40.41
RV/PRV                      (no outliers)	94.0/87.1	91.3/85.5	98.9/87.1	Not Used
Quality	S&P = A+	Same	Same	TS = 3.2 unacceptable
PTPM – 5 yr ave	12.0%                  Trend up	Same                  Same	Same                 Same	11.2%                  Trend N/A
ROE – 5 yr ave Begin yr Equity	20.7%                 Trend down	Same                Same	Same                Same	19.0%                  Trend N/A
Debt to Equity –    5 yr ave	88.4%              Trend down	Same               Same	Same             Same	N/A                   N/A

Estimating Future Sales and EPS  

 Kamie’s SSG: 

 – Kamie used the BI/NAIC Preferred Procedure that began with her Sales Growth estimate of 8.00% which, she wrote, was 1% more than CHD’s organic growth.  She then made one change in the default PP and used 14.0% (instead of 12.0%) for CHD’s future Pre-Tax Profit Margin.  That resulted in an 8.90% EPS estimate which she lowered to 8.00%. 

 ** Zacks.com was estimating 12.00% Sales growth in the next 5 years and Morningstar was estimating organic sales growth (no acquisitions) of 4%-6% annually over the next five years. 

 ** CHD’s historical Sales & EPS growth has been 13.4% & 13.2% for the last five years, 11.6% & 15.3% for the last three, and 9.1% & 19.8% for the last two.  Its several acquisitions make this history difficult to rely on. 

Armin’s SSG: 

 – When I did my SSG, the seven analysts I always check were closely estimating long-term EPS at an average of 12.29% with S&P high at 13.00% and Reuters.com, Morningstar.com, and Value Line all low at 12.00%; 

 ** I used 10.00% for my estimated EPS, the very lowest of the estimates by the 5 analysts at CNNMoney via FactSet CallStreet and by the 3 analysts at Reuters which, by comparisn, is a conservative estimate.

** For how I estimate EPS for all my SSGs, see: Estimating EPS 

Return on Equity (ROE) 

– CHD’s 5 year average ROE is trending down which is usually a red-flag warning sign of deteriorating quality: 

 ** With Hemscott-Morningstar data, CHD initially appears worse than its industry average (15.6% vs 48.5%, Household Products Industry), but the average is distorted by CLX’s 290.2% ROE.  After I remove Clorox, CHD is better than its adjusted industry average (15.6% vs 12.2%) and we get a more realistic comparison as a result. 

** With S&P data, CHD is worse than its industry average (20.7% vs 29.2%, Household Products Industry).  However, CLX’s 179.9% ROE also distorts this average, but a company-by-company breakdown is not available so I cannot adjust the industry average to remove outliers.   

** With CHD’s company data, the Bob Adams spreadsheet shows CHD with a 15.2% ROE (Net Income / Total Equity, debt not included) which it considers very good. 

** For more on using Industry data, see Investigating Industry Info . 

What Can We Learn from the Quarterly Trend Analysis/ PERT-A?   

– The Quarterly Trend Analysis in Toolkit 6 is the same as the PERT-A in TK 5. 

– Sales Growth quarterly TTM % change (Worksheet, column S) has declined for 10 consecutive quarters from 17.1% in September 2007 to 4.1% in December 2009.  This looks like a worrisome red-flag warning to me. 

– EPS Growth quarterly TTM % change (column R) has increased during the same 10 quarters from 18.0% to 24.3%.  This looks good historically, but is not indicative of  future EPS given CHD’s declining TTM Sales Growth. 

 Quality 

– S&P gives CHD an A+ for quality, its highest of 8 grades, whereas Take Stock gives CHD a 3.2 which is unacceptable (with 3.4 the minimum required to pass muster and 6.7 is desired). 

– Take Stock seems goofy to me as a whopping 7536 stocks out of 7773 total (97%) fail and get under 3.4 with 4218 (46%) getting a grade of Z-E-R-O. 

  

– Armin 

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 Notes: 

A: Interest Coverage Ratio (from 2008 A.R.) = Adjusted EBITDA as per loan agreement / Total Interest Expense

B: Leverage Coverage Ratio = Total Debt / Adjusted EBITDA

C: LT Debt to Equity Ratio (from Bob Adams’ spreadsheet) = Long Term Debt / Total Equity

D: Cash Flow Growth = Current Year Cash from Operations / Prior Year Cash From Operations

E: Free Cash Flow Margin = Net Cash from Operations – Property, Plant & Equipment – Dividends / Sales

F: Total Interest Coverage = Pretax Profit + Total Interest Paid / Total Interest Paid