Streetwise

Lauren Rudd

Sunday, May 18, 2014

Confidence and Determination are Key

Given the many facets of uncertainty facing the financial markets, does Wall Street still make sense? Absolutely, moreover opportunities to invest in the shares of quality companies are 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.

Yet, you do not need to make your life unnecessarily difficult. Combine determination with a sense of confidence and you can be successful. Or to quote George Zimmer, founder and former CEO of the Men's Wearhouse, “I guarantee it.”

Consider for example Church & Dwight, a company best known for its Arm & Hammer baking soda. Today the company is a diversified mix of consumer products spread between three divisions: Domestic Consumer, International Consumer and Specialty Products. Domestic Consumer accounts for approximately 75 percent of current revenues and earnings. However, International is growing rapidly and accounts for 17 percent.

Within those divisions Church & Dwight sells over 80 different brands. Nine of them; Arm & Hammer, Oxiclean, Trojan, and Vitafusion & L'il Critters, account for 60 percent of the company’s revenues.

Total compounded annual shareholder return over the past 10 years is approximately 16 percent, far surpassing the S&P 500. Worldwide revenues increased 9.3 percent, while earnings per share increased 13.9 percent in 2013, marking the 13th consecutive year of greater than 10 percent EPS growth.

The company announced an 11 percent dividend increase in late January, chalking up its 453rd consecutive regular quarterly dividend, going as far back as 1902 - quite impressive.

When I last wrote about the Company a year ago, my earnings projection for 2013 was $2.80 per share, with a projected 12-month share price of $72. The shares recently closed at $67.89. Earnings were $2.79 per share, a penny under my estimate. So how will the company do in the year ahead?

Revenues for the first quarter of 2014 were up 0.3 percent to $782.0 million. Organic sales increased 1.2 percent, driven by 4.4 percent growth in volume, partially offset by an adverse impact of 3.2 percent due to pricing. First-quarter earnings were 73 cents per share, a 4 percent decline from a year ago due to additional costs from product launches and foreign currency fluctuations.

The company’s gross margin contracted 1.5 percent to 43.4 percent, the result of higher investments in promotion and partly offset by increased productivity.

Compared to the same period a year ago operating income fell 4.3 percent, while operating margin contracted approximately 1 percent due to new product launch expenses.

Look for 3 to 4 percent organic sales growth in 2014, the result of continued product innovation. For example, Arm & Hammer is creating a premium cat litter and new premium toothpaste, Oxiclean is offering a new laundry detergent, dishwashing detergent and bleach alternative. Keep in mind that 25 percent of 2013 sales were from products launched after 2007.

With $500 million in cash from operating activities, minus the $67 million spent on capital expenditures, Church & Dwight had free cash flow of $433 million in 2013. About $1.5 billion in free cash flow is anticipated over the next 3 years, meaning that additional acquisitions and capital investments are likely.

Cost control is excellent, with overhead as a percentage of revenue only 13 percent. And the company has not only outperformed the market during the last 5-year bull market, it also was among one of the best-performing stocks during the depths of the recession, a commendable performance.

The intrinsic value of the shares, using a discounted earnings model with a 12 percent discount rate is $75 per share. The more conservative free cash flow to the firm model offers up an intrinsic value of $81 per share. My earnings estimate for 2014 is $3.05 per share, with a projected 12-month share price of $76, for a 12 percent capital gain. There is also an indicated 1.80 percent dividend yield.