Church & Dwight Stock: Q3 Earnings Might Spur Growth

  • Church & Dwight stock is lagging its peers despite exceptional sales and earnings growth.
  • The stock’s valuation continues to stall the upside in the stock.
  • Organic sales will likely grow at a strong pace in the third quarter.
  • The EPS growth could decelerate due to increased investments.

Church & Dwight (CHD) will announce its third-quarter earnings on Thursday. We expect the company to maintain its impressive organic sales growth. Notably, Church & Dwight’s organic sales have increased at more than a 4% rate for five consecutive quarters. We expect the trend to continue, which reflects a favorable price and product mix. New products, category growth, and market share gains will likely support the company’s growth.

Despite strong growth in underlying sales, we expect Church & Dwight’s earnings growth rate to decelerate sequentially. Higher investments in brand building, new products, and research and development will likely hurt the company’s earnings growth rate.

While the low EPS growth projection could irk investors, Church & Dwight’s high valuation acts as a deterrent and limits the stock’s upside. Notably, the company’s financial performance has outperformed most of its peers in the last several quarters. However, Church & Dwight stock is lagging its peers in terms of growth due to its high valuation multiple.

For instance, the stock has risen 13.4% on a YTD (year-to-date) basis as of Monday. In comparison, Kimberly-Clark (KMB) and Procter & Gamble (PG) shares have risen 15.7% and 34.3%, respectively. Meanwhile, the S&P 500 has risen 21.2% YTD.

Procter & Gamble’s outperformance reflects the company’s stellar organic sales growth and margin expansion. Also, the company has a strong history of beating analysts’ EPS estimates, which supports the uptrend in its stock.

Analysts’ expectations for Church & Dwight 

Analysts expect Church & Dwight to post revenues of $1.1 billion, up about 6% on a YoY (year-over-year) basis. A favorable pricing and mix, strong volumes growth in international markets, and new product launches will likely drive the company’s top line.

Analysts expect Church & Dwight to post an adjusted EPS of $0.61 in the third quarter—up about 5% on a YoY basis. The earnings growth projection reflects a sequential deceleration in the growth rate. Investments in brand building and new products will likely restrict Church & Dwight’s earnings growth rate. However, higher organic sales and moderating input cost pressure will likely support the company’s margins and EPS.

Higher pricing and favorable input cost trends are supporting household and personal care product manufacturers’ sales and margins. Recently, Kimberly-Clark posted its third-quarter earnings. The earnings beat analysts’ expectations due to higher pricing and favorable commodity costs. However, continued weakness in volumes remained a drag on Kimberly-Clark’s top line. The company’s organic sales increased 4%.

Meanwhile, Procter & Gamble had an impressive quarterly performance. The company’s organic sales rose 7%. Balanced growth in the volumes, pricing, and mix supported Procter & Gamble’s exceptional increase in underlying sales. Meanwhile, the company beat analysts’ EPS expectations by a wide margin. Procter & Gamble’s core EPS rose 22% YoY.

Stock’s valuation versus its peers

Church & Dwight trades at a forward PE ratio of 28.9x, which is well above the peer group average of 22.4x. In comparison, Kimberly-Clark and Colgate-Palmolive stock trade at forward PE ratios of 18.4x and 23.2x. Procter & Gamble and Clorox stock trade at PE ratios of 24.6x and 24.5x, respectively.

Church & Dwight’s premium valuation compared to its peers was warranted due to its higher growth rate. While we expect the company to sustain the growth momentum, the pace of growth could decelerate due to tough YoY comparison. Church & Dwight’s high valuation and expected moderation in the growth rate could limit the upside in the stock.

Most of the analysts maintained a neutral outlook on Church & Dwight stock before the third-quarter earnings announcement. The consensus target price indicates a potential upside of 3% based on the company’s closing price of $74.60 on Monday.