Streetwise

Lauren Rudd

Sunday, April 28, 2013

Does Wall Street Still Make Sense

Given the many facets of uncertainty facing all economies, including our own, does Wall Street still make sense? Absolutely, if you believe the results of Barron's recent semiannual Big Money poll of professional investors. That poll just set a record for bullishness.

Specifically, 74 percent of those polled stated they were bullish or very bullish regarding the prospects for stocks going forward well into 2014. Moreover, it was the highest percentage of bulls in more than 20 years.

About a third of the managers polled expect the Dow Jones Industrial Average to scale 16,000 by the middle of next year. And there is a surprising dearth of bears. A mere 7 percent of the respondents are pessimists, down from 27 percent last fall.

Six months ago, just 46 percent of managers making up the poll were bullish, down from 55 percent in the spring 2012 poll. Meanwhile, stocks have rallied 10 percent since the Big Money fall survey published on October 29.

I would take that survey one step further and personally state that opportunities to invest in the shares of quality companies are always abundant in any economic environment. Nonetheless, to seize the moment requires that you do more than just research out possible candidates. It requires a willingness to make decisions with prodigious confidence.

Nevertheless, you do not have to make your life unnecessarily difficult. Combine value with a sense of confidence and you will become a successful investor. Or to quote George Zimmer, founder and CEO of the Men's Wearhouse, “I guarantee it.”

A good place to begin your selection process might be with a longtime 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 2012 was $2.40 per share with a projected 12-month share price of $57, thereby producing a 12 percent capital gain, plus an indicated dividend yield 1.90 percent.

The shares recently closed at $63.94, so the Company well exceeded my share price estimate. Earnings for 2012 came in at $2.48 per share, again exceeding my estimate. Now the question is how will the company do going forward.

Church & Dwight is immensely profitable, producing an 11 percent return on sales in fiscal 2012. In addition, the company repurchased $242 million worth of its common stock. However, it has also taken on an additional $650 million worth of debt, thereby bringing the total owed to $903 million, which includes both long and short term liabilities.

While the company has been growing earnings at a very respectable rate over the past several years, for a company with $4 billion in total assets, having to service nearly a billion dollars of debt could prove challenging, especially if the macroeconomic environment deteriorates.

Church & Dwight is forecasting organic sales growth of 3 to 4 percent in 2013, with a 25 to 50 basis point gross margin increase. The Company also anticipates that 2013 will be a much stronger year for reported sales growth, due in part to Avid.

Closed early last October, the acquisition of Avid brought with it Vitafusion, the number one brand in adult gummy-form vitamins, and Lit'l Critters; the top brand in children's gummy-form vitamins.

However, the margin improvement in the Company’s core base of business will be offset by the lower margin produced by Avid. In a strong move, the Company plans to increase its marketing outlays in 2013, focused behind the launch of innovative new premium products based on the Company's power brands.

Looking ahead, the Company’s fiscal 2013 guidance has earnings per share increasing to $2.79. Meanwhile, earnings per share for the first quarter are expected to increase by 8 percent when compared with fiscal 2012.

The intrinsic value of the shares, using a discounted earnings model with a 12 percent discount rate is $63 per share. The more conservative free cash flow to the firm model offers up an intrinsic value of $81 per share.