Church & Dwight Co., Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Church & Dwight Co., Inc. is a consumer products company, primarily focused on household and personal care products with leading brands, and their segments includes Consumer Domestic, Consumer International and Specialty Products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Church & Dwight (CHD), established in 1846, boasts a diverse portfolio of well-known consumer brands and a significant presence in various markets. The company operates across three primary segments: Consumer Domestic, which includes household and personal care products in the U.S.; Consumer International, focused on global sales of similar product lines; and Specialty Products, which comprises a range of specialty chemicals, animal nutrition, and baking soda businesses.

Business Overview

  • Consumer Domestic: This is the largest segment, accounting for a majority of CHD’s sales. It includes well-known brands like Arm & Hammer, OXICLEAN, and Trojan, spanning across laundry detergents, cat litter, toothpastes, and feminine health products. These products are primarily sold in the U.S. through a variety of channels including grocery stores, drug stores, mass merchandisers, and e-commerce platforms.
  • Consumer International: This segment markets and sells similar products to the Consumer Domestic segment, but across the global market. Its products and their marketing are adapted to local markets to ensure their success. Europe, Asia, South America and Canada are some examples where it’s actively sold.
  • Specialty Products: This segment includes specialty chemical products including baking soda which are used in food, medicine, and industrial manufacturing. Animal feed and food production ingredients are also part of this segment.

Industry Trends and Competitive Landscape

The consumer products industry is characterized by several key trends:

  • Brand Loyalty and Pricing: Strong consumer brands can command a premium over lower-priced private labels, as consumers often value familiarity and consistency.
  • E-commerce Growth: The rise of e-commerce has created new avenues for growth while also introducing new challenges for brands with traditional distribution. Companies need to be present in online channels.
  • Sustainability: Increasingly, consumers are choosing to buy sustainable, eco-friendly products. Companies with a strong Environmental, Social and Governance (ESG) framework are also preferred.

The competitive landscape is intense, with both large multinationals and smaller niche competitors vying for market share. In consumer goods, strong competitors include giants like P&G, Unilever, and Colgate-Palmolive, who have massive reach and budget. These are all very stable companies with very well-known brands.

What Makes CHD Different

  • Strong Brand Portfolio: CHD boasts a portfolio of brands that enjoy high levels of consumer recognition and loyalty, often based on a long history in their product categories. Brands like ARM & HAMMER have strong brand recognition which is very hard to replicate.
  • Balanced Segments: CHD’s diversified portfolio, which spans across household products, personal care and speciality products in multiple geographies reduces its overall risk.
  • Innovation: The company invests in research and development, to develop new products and improve existing ones. The focus is to produce effective and high-quality products that offer value and sustainability to consumers.
  • Cost Efficiency: Continuous initiatives to improve efficiency are done, ranging from manufacturing process to supply chain management. This allows the company to have better margins and be more competitive.

A key to CHD’s success is its strategy to own well-known consumer brands and to maintain a balance across its segments. The focus on value-creating products also enables pricing power, while its ongoing supply chain innovations boost efficiency.

Financial Analysis

  • Revenue Growth: Over the past few years, CHD has shown a consistent increase in sales. In 2022, net sales reached $5.3 billion, a 1.6% increase over 2021. This growth can be attributed to successful acquisitions and price increases. Consumer Domestic segment grew 4.9%, while Consumer International and Specialty Products decreased by -3% and -3.7% respectively.
  • Margins: Gross margins have ranged around 44-45% over the past few years, while operating margins are around 20% and above. SG&A expenses are relatively high, usually around 16% of sales. Management is continually focused on optimizing operations and lowering expenses, in order to increase profits.
  • Net Profit: Profitability of the company is stable. Net profit was $533.8 million in 2022 and $588.1 in 2021, with fluctuations in those numbers mainly coming from costs from acquisitions or changes in operating expenses.
  • Return on Invested Capital (ROIC): Church & Dwight’s ROIC is generally in the high teens or low twenties.
  • Cash Flow: The business consistently generates high free cash flow. In 2022, CFO was $1 billion, capex $190.4 million, giving a FCF of around $809.6 million. 2021 FCF was a little above $600 million, but was negatively affected by working capital. The free cash flow is used for dividends, share repurchases, and paying down debt.
  • Capital Structure: Debt has increased to around $2.5 billion from 2 billion in the last three years. A significant portion of the debt is term debt. Equity has stayed consistent, around 4.7B to 5 billion dollars.

The company consistently generated good free cash flow over the years and is well-positioned to generate consistent returns moving forward.

Recent Concerns and Management Outlook

  • Inflation: Increased costs associated with inflation had a negative impact on the company’s margins and supply chains. However, management stated they are dealing with that and have been able to offset some cost increases by raising prices, while also managing expenses effectively.
  • Currency Fluctuations: Strong dollar negatively impacts revenues and profits overseas. Management has stated that it will have limited effects over time.
  • Acquisitions: Recent acquisitions may affect profits in the near-term. The management is confident they will generate good value in the long run. They are trying to leverage their acquisition model and the brands they own, while streamlining expenses to achieve more synergies.
  • Supply Chain Issues: The management is monitoring the supply chains closely and is working to mitigate disruptions to avoid any potential revenue or profit loss.
  • Competition: The industry is competitive. Brands need to constantly adapt to changing consumer preferences and come up with innovative, high quality products to maintain market share. The management is aware of it and continually tries to innovate.

Moat: 3/5

  • Intangible Assets (Brand Recognition): CHD’s portfolio of well-known, trusted brands provides a significant competitive advantage. Brands like Arm & Hammer and OxiClean have a long history and high familiarity, giving them pricing power and customer loyalty.
  • Switching Costs: Some of the products, like cat litter or toothpaste, may have customer stickiness, as changing products could involve a period of adjustment or experimentation that many people want to avoid. The time taken to find products that work can make switching expensive.
  • Limited Scale Advantage: Even with its large size, the company does not have a significant scale advantage as it mainly sells consumer products, where economies of scale can be obtained but does not give them a strong advantage over all competitors.
  • Limited Network Effects: As a company that focuses on physical products, CHD does not benefit from network effects that technology companies do.

Understandability: 2/5

Although the business itself seems simple-as the production and selling of consumer goods is easy to grasp-it is actually quite complicated to value it based on the several aspects which are mentioned in the report, like brand value, supply chain, acquisitions, the competitive landscape, and management’s decisions.

Balance Sheet Health: 4/5

CHD has relatively high debt, which has increased in the past years due to acquisitions, but it has good cash flows to maintain and service it. The company consistently generates high free cash flow, which allows it to invest, pay dividends, and pay down debt. However, a lot of their assets are tied into goodwill and intangible items.

In summary, Church & Dwight is a good company, with a portfolio of great consumer brands and is well positioned to grow steadily. However, the company also faces multiple issues, including supply chain issues, the rising costs due to inflation, and more competition. An intelligent investor must be aware of these facts and weigh them before investing in the stock.