Streetwise

Lauren Rudd

Sunday, May 1, 2011

Investment Opportunities Are Abundant

Given the many facets of uncertainty facing the national and global economy, does investing in stocks at this time make sense? 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 longtime favorite of mine, Church & Dwight (CHD), best known for its Arm & Hammer baking soda.

When I last wrote about the company a year ago, my earnings projection for 2010 was $4.00 per share with a 12-month target price on the shares of $79, for a potential capital gain back then of 14 percent. In addition, there was an indicated dividend yield of 0.80 percent. So how did the company do?

To start, the shares recently closed at $79.53, so I was on the money with regard to share price performance. Earnings for 2010 came in at $3.96 per share, excluding one-time charges, four cents light of my estimate. Nonetheless, the company still managed to increase sales by 2.7 percent. More importantly, organic sales growth, which excludes the impact of foreign exchange rate changes, acquisitions, divestitures and the effect of a change in customer delivery arrangements, increased 3.0 percent.

Free cash flow (defined as net cash from operating activities less capital expenditures) was up 37 percent to $365 million versus $266 million in the prior year. The increase in free cash flow was primarily related to lower capital expenditures, higher net income and improved working capital management.

The company also declared a 100 percent increase in its regular quarterly dividend, from $0.17 share to $0.34 per share. The higher dividend raises the annualized dividend payout to approximately 30 percent of 2011 projected net income.

In its guidance going forward, the company indicated that it expects to continue to generate organic sales growth in the range of 3 to 4 percent, while increasing its gross margin by 50-100 basis points, (there are 100 basis points in a percentage point). The subsequent increment in gross profit will be used to expand the company’s marketing program.

Earnings guidance for 2011 is $4.35 to $4.40 per share. However, it is necessary to keep in mind that first quarter organic sales growth is expected to be the lowest of the year due to the year-over-year timing of new product launches and retailer inventory actions. First quarter numbers are due out on May 6. My earnings projection for the first quarter is $1.14 per share as compared to $1.11 in 2010.