Church & Dwight Stock: Valuation Overshadows Growth

• Church & Dwight stock lags its peers despite its stellar growth rate.
• The company’s high valuation overshadows its growth and limits the upside.

Church & Dwight (CHD) stock has risen 9.5% on a YTD (year-to-date) basis as of September 13. However, the stock lags its peers by a wide margin despite strong sales and earnings growth. In comparison, Procter & Gamble (PG), Kimberly-Clark (KMB), and Colgate-Palmolive (CL) stocks have risen 32.9%, 16.2%, and 18.8% this year.

Higher pricing has driven these companies’ organic sales and stock prices.

Church & Dwight’s organic sales have risen more than 4% in the past five quarters, which is exceptional. The company’s EPS has increased more than 16% in the last seven quarters. We expect Church & Dwight to sustain its momentum in the coming quarters due to innovation and balanced growth in volumes and price.

However, the company’s high valuation restricts the upside in its stock. Weakness in Church & Dwight’s specialty product division will likely hurt its sales growth rate. During the last reported quarter, the specialty product division’s sales fell 5.4% YoY (year-over-year).

Church & Dwight stock trades at 26.7x its 2020 estimated EPS of $2.70, which looks expensive based on the projected growth of 8% during that period. Also, Church & Dwight stock trades at a high valuation compared to its peers. The stock trades at a 15% premium compared to the peer average of 23.2x.

While Church & Dwight’s high valuation is a concern, we don’t like its peers’ valuations either. Procter & Gamble, Colgate-Palmolive, and Kimberly-Clark stock trade at forward EPS multiples of 25.1x, 24.0x, and 18.7x, respectively. Clorox, which had disappointing sales, is trading at a forward PE ratio of 24.9x.

We expect Church & Dwight to continue to outperform its peers due to its sales and earnings growth rate. Management lifted its fiscal sales outlook. The company’s sales will likely increase 6% in 2019. Earlier, management projected 5%–6% growth. Church & Dwight’s organic sales will likely increase 4%—up from the previous guidance of 3.5% growth.

The gross margin is forecasted to increase by 80 basis points—up from earlier growth guidance of 50 basis points. Meanwhile, the adjusted earnings are projected to be $2.47 in 2019, which is at the higher end of the previous guidance of $2.43–$2.47.

Analysts expect the company’s top line to continue to grow at a mid to high-single-digit rate in coming quarters, which is higher than what analysts project for its peers. Notably, analysts expect Church & Dwight’s bottom-line growth rate to beat its peers.

Analysts have a target price of $76.67 on Church & Dwight stock, which implies an upside of 6.5% based on its closing price of $71.98 on September 13. In comparison, analysts’ target price indicates little or no growth for Procter & Gamble and Clorox stock.