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Why Church & Dwight Stock Is Underperforming Its Peers

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  • Church & Dwight stock is lagging behind its peers by a wide margin so far this year.
  • High valuation and moderating growth are to blame.

Church & Dwight stock (CHD) has underperformed its peers as well as the broader markets by a wide margin so far this year. Notably, the company’s organic sales and earnings have increased at a robust pace in the first three quarters of 2019. However, Church & Dwight stock’s high valuation and expected moderation in organic sales and earnings growth are taking a toll.

CHD stock is up 6.8% year-to-date as of November 27. In comparison, shares of Procter & Gamble (PG) and Kimberly-Clark (KMB) are up 32.5% and 19.6%, respectively. Meanwhile, Colgate-Palmolive (CL) stock is up 13.7%. The S&P 500 rose 25.8% year-to-date.

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Church & Dwight stock valuation summary

Church & Dwight stock has historically traded at a higher valuation multiple when compared to its peers. CHD’s premium valuation was due to its stellar sales and earnings growth rate. However, with moderating growth, CHD stock’s valuation looks unattractive.

For instance, CHD stock trades at a forward price-to-earnings multiple of 26.8x. This is nearly 20% higher than the peer group average. In comparison, KMB, CL, PG, and CLX stock trade at a forward PE ratio of 19.0x, 23.2x, 24.3x, and 24.0, respectively.

Meanwhile, Church & Dwight stock trades at 17.8x its next 12-month EV-to-EBITDA multiple. This is also higher than the peer group average of 15.11x.

CHD’s growth is moderating

Church & Dwight’s organic sales rose by 3.6% during the last reported quarter. The increase was better than what management expected. However, the underlying sales growth rate moderated sequentially. Notably, Church & Dwight’s organic sales rose by more than 4% in the past five quarters. But organic sales growth slowed to 3.6% in the third quarter. Management expects fourth-quarter organic sales to be 3%, which indicates further sequential deceleration.

While organic sales growth is likely to moderate a bit, net sales growth could accelerate. Benefits from the FLAWLESS acquisition are expected to accelerate the net sales growth rate in the fourth quarter.

CHD’s revenues increased by about 10% in 2018. However, analysts expect 2019 net sales to increase by 5%.

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On the earnings front, CHD’s bottom line has increased at a double-digit rate in the last eight consecutive quarters. However, CHD’s bottom line is likely to decline in the fourth quarter. The sharp deceleration in earnings growth rate is due to the management’s planned investments in both marketing and research and development.

Management expects fourth-quarter adjusted earnings to be $0.54 per share, which implies a YoY (year-over-year) decline of 5%. Analysts expect CHD to post adjusted EPS of $0.55 in the fourth quarter, suggesting a YoY decline of nearly 4%.

Church & Dwight’s recent financial performance

Church & Dwight broke its long streak of beating Wall Street’s sales estimates. During the last reported quarter, CHD’s revenues fell marginally short of analysts’ estimates due to weak volumes in the Consumer Domestic segment. Lower sales in the Specialty Products segments further dragged revenues down. Notably, CHD exceeded Wall Street’s revenue estimate in the last eight quarters before the third-quarter miss.

Higher pricing and favorable mix are supporting organic sales in the Consumer Domestic division. However, volumes are taking a hit from higher pricing and fewer promotions.

The Consumer International segment sustained the growth momentum and reported stellar growth. During the third quarter, the Consumer International segment’s organic sales jumped 8.7%. Balanced growth in both volumes and pricing drove robust growth.

The Specialty Products division continued to stay weak and marked a 4.1% decrease in organic sales. Waning demand for dairy products continues to hurt top-line growth.

CHD’s third-quarter adjusted EPS of $0.66 came ahead of analysts’ expectations of $0.61 and rose 13.8% YoY. Higher sales and margin expansion drove the bottom-line growth.

In comparison, Procter & Gamble reported stellar growth in its organic sales during the last quarter. PG’s organic sales rose 7%.  Notably, Procter & Gamble handily exceeded Wall Street’s estimates both on the sales and earnings fronts.

Meanwhile, Kimberly-Clark’s third-quarter organic sales were impressive. Higher pricing supported organic sales growth. However, volumes remained weak.

Church & Dwight stock outlook

We expect Church & Dwight could continue to post healthy growth in both sales and EPS in the coming quarters. Barring the anticipated decline in the fourth quarter, CHD’s bottom line is likely to grow at a high-single-digit rate.

We believe favorable pricing and mix and sustained momentum in the international segment are likely to drive its top line. Moreover, cost savings and higher pricing are expected to support margins and, in turn, its EPS.

However, Church & Dwight stock’s high valuation and deceleration in growth are likely to limit upside. Analysts have a price target of $74.13 on Church & Dwight stock. The price target implies a potential upside of 5.6% based on its closing price of $70.20 on November 27.

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