Streetwise for Sunday May 10, 2009

Streetwise

Lauren Rudd

Sunday, May 10, 2009

"I Guarantee It"

Given the many facets of uncertainty facing our economy, does investing in stocks still make sense? That question is rears itself endlessly, regardless of market trends or economic climate. At the risk of incurring the ire and wrath of market timers, there is no bad time to invest.

Investment opportunities are abundant in any environment. However, to seize the moment requires that you do more than just research out possible candidates. It requires a willingness to make your own decisions with confidence. Ask yourself if you have what it takes to stay the course despite the consternation of others.

Rudyard Kipling said it well. To paraphrase a few lines from a poem of his, if you can trust yourself when all men doubt you, if you can wait and not be tired by waiting, or watch the things you gave your life to break, and then stoop and rebuild with worn-out tools. If you can take your winnings, risk them, lose and start again, never breathing a word about your loss...then you'll be a man, my son.

However, do not make your life unnecessarily difficult. Select investment candidates whose fundamentals have shown solid growth in the past with the potential to generate value going forward. Combine value with a sense of confidence and you will become a successful investor. Or as George Zimmer, founder and CEO of the Men's Wearhouse, is so fond of saying, “I guarantee it.”

A good place to start your selection process is with those not-so-sexy companies that produce mundane products designed for everyday consumption. An excellent example is a long time favorite of mine, Church & Dwight, best known for its Arm & Hammer baking soda. Although the shares are down about 1.49 percent year-to-date, the total return over the past three years is an amazing 54 percent.

My earnings estimate from a year ago was $2.80 per share in 2008 and $3.18 per share in 2009. Actual earnings for 2008 came in at $2.86. Sales increased 9.1 percent to $2.422 billion and free cash flow (defined as cash from operating activities less capital expenditures) increased 19 percent to $238 million. So the next question is how has the company done recently?

On May 5, Church & Dwight reported first quarter net income of $62.6 million or $0.88 per share, as compared to $56.2 million or $0.81 per share for the same period a year ago. If you exclude a plant restructuring charge, first quarter earnings were $0.92 per share.

Net sales for the quarter increased 5 percent to $580.9 million, while organic sales growth was up by 6 percent. Those numbers exclude the impact of foreign exchange, acquisitions and divestitures.

The company generated $70.7 million in free cash flow in the first quarter, compared to $56.4 million in the prior period. The increase was primarily attributable to higher net income, higher non-cash expenses and improved working capital management.

In terms of capital improvements, Church & Dwight plans to open a new integrated laundry detergent manufacturing plant and distribution center during the fourth quarter of 2009. Additionally, there are plans to introduce over 20 new products during 2009.

As part of its earnings announcement, Church & Dwight raised its adjusted 2009 earnings guidance to between $3.30 and $3.35 per share. Moreover, the company expects to achieve an annual organic revenue growth rate of at least 3 percent.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 12.5 percent and a discount rate of 7 percent, is $107 per share. The more conservative free cash flow to the firm model, with the same earnings growth rate, yields an intrinsic value of $98 per share.