Church & Dwight Co., Inc. (CHD): Buy This Perfect Stock With a Perfect Record

How many stocks can you name that have a perfect record over the past 10 years? By perfect I mean a decade of annual gains. Not one losing year — 2008 included.


Not very many, I would think. So, let me help you. The short answer: At least one.

Church & Dwight Co., Inc. (CHD) is a stock whose consistency over the years is hard to beat. Up 9% YTD through April 21 and every year for the past decade, CHD’s valuation is currently well above historic levels.

Time to sell, right?

Wrong. Here are three reasons why this momentum stock is still a buy.

First Reason to Own CHD: Attractive M&A Target

I can vouch for some of its products; Oxi Clean being the most recent testament (it got olive oil out of a dress shirt) to the consumer-products company’s ability to deliver the goods, both in the grocery aisle and on the stock market.

Its all-around performance has made Church & Dwight a very attractive M&A target for both Procter & Gamble Co (PG) and Colgate-Palmolive Company (CL) whose market caps are 18 and 6 times larger respectively. Both would consider CHD a light, midday snack.

But, make no mistake, Church & Dwight would make for a very enjoyable meal given its operating margins are higher than most all of its competitors, Reckitt Benckiser Group Plc (RBGLY) being the only exception.

An athlete’s value to their team is never higher than when he or she is delivering peak performance; ironically, it’s at this same point that their trade value balloons. Church & Dwight is currently delivering peak performance, and that makes it very attractive to its bigger peers.

With an enterprise value of over 16 times EBITDA, CHD does have a high valuation, but sometimes you have to pay up for quality. In 2016, look for somebody to come calling.

Second Reason to Own CHD: Good Focus

It follows the 80/20 rule.

It has nine power brands including Arm & Hammer, Trojan, Oxi Clean and L’il Critters; those brands generate 80% of both its revenue and profits.

Two years ago, Procter & Gamble moved to sell up to 100 brands in order to focus on the 70-80 “core” brands generating the lion’s share of revenue and profits. It just makes good business sense to allocate your full resources to only those brands that are going to drive growth.

Church & Dwight’s formula for delivering market share growth is a combination of three things: creating innovative new products and product extensions (think Arm & Hammer cat litter), increasing how much it spends on marketing for its power brands (company literature suggests it’s one of the top 20 advertisers in the U.S.) and then pushing hard to increase distribution, which generally translates into higher revenue.

By religiously focusing on meeting or exceeding the annual product category growth for each of its power brands, CHD has been able to consistently grow market share, a big reason why its stock has managed to deliver market-beating returns.

Third Reason to Own CHD: Acquisitions?

Is Church & Dwight the hunted or the hunter?

While it’s definitely one of, if not the biggest takeover candidates in the consumer products industry, its DNA resides in acquisitions, most of them smallish in nature. Since 2001, it’s acquired eight of its nine power brands (Arm & Hammer, the exception), the largest deal costing it $650 million.

Its plan is simple.

It buys brands with high margins and market shares, doesn’t overpay for them, and then grows them organically through the process mentioned previously, all the while converting free cash flow at a better rate than anyone in the industry.

According to Bloomberg, CHD said at an analysts’ conference in February that it has the capacity to pull off a $2.8 billion acquisition; currently, it has less debt than trailing 12-month EBITDA.

Will it pull off this kind of monster deal given it would be about four times the largest in company’s history? That’s hard to say, but if it wants to remain independent, it might not have a choice.

If it were long-time Teledyne CEO Dr. Henry Singleton making the decision, he’d use CHD stock as opposed to debt. I can’t say I disagree.

Whether Church & Dwight is a buyer or seller, CHD stock is still worth owning, despite the nosebleed valuation.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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