Streetwise for May 9,  2010

Streetwise

Lauren Rudd

Sunday, May 9, 2010

Does Investing In Stocks Make Sense At This Time?

Given the many facets of uncertainty facing the global economy, does investing in stocks at this time make sense? That question rears itself in some format 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 and have 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.

When I last wrote about the company a year ago, my earnings projection for 2009 was $3.40 per share, with a 12-month price target on the shares of $65, for a potential gain back then of 19 percent. So how did the company do?

To start, the shares recently closed at $69.31, which exceeded even my expectations. Earnings for 2009 came in at $3.41 per share or $3.48 per share if you exclude one-time charges and gains.  At the same time, the company posted organic sales growth of 4.7 percent.

Cash flow from operating activities increased 19 percent to $401 million. Free cash flow (defined as net cash from operating activities less capital expenditures) was up 12 percent to $266 million. The increase was attributable to higher net income and improved working capital management. However, the free cash flow number did show the effects of higher capital expenditures.

For 2009, Church & Dwight had net debt of $369 million (total debt of $816 million less cash of $447 million), as compared to $658 million at the end of 2008. The leverage ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was 1.6 times earnings. Capital expenditures were approximately $135 million and included approximately $85 million related to the construction of a new detergent manufacturing facility.

Church & Dwight’s guidance for 2010 indicates that the company expects to post organic sales growth of approximately 4 to 5 percent going forward, as it expands its profit margins. In addition, a significant investment is being made in a global information systems project that will enhance cost management capabilities. And the company’s strong balance sheet and free cash flow position could result in additional acquisitions as the year progresses. The company’s earnings guidance for the year is $3.93 to $4.00 per share, a 13 to 15 percent increase over 2009.