Church & Dwight: Added another brand (NYSE: CHD)
In the last days of 2021, I called Church and Dwight (NYSE: CHD) an excellent portfolio of brands for all wallets. The company had a tough and challenging 2021 amid tough post-pandemic comparisons. As the company has deleveraged the balance sheet and announced another bolt-on deal, lure was on the long-term horizon, but valuations were still full.
to sum up
Church & Dwight is a conglomeration of so-called power brands with the goal of creating a diverse, lean, high-margin, high-growth consumer products empire. Pre-pandemic, Church posted a 5% increase in sales in 2019 to $4.4 billion, with EBITDA trending around $1 billion and adjusted earnings around $2.50 per share, while leverage was around 2x EBITDA. With shares trading near the $90 mark, valuations were very demanding.
The company has seen solid organic growth in the wake of the pandemic, with sales up around the double-digit mark. Ultimately, 2020 revenue rose 12% to $4.96 billion, with operating profit reaching $1.03 billion and adjusted earnings reaching $2.83 per share, net debt falling just below the $2 billion mark. The company has guided another 6-8% revenue growth in 2022 with earnings per share of around $3 per share, or just pennies above that mark.
During the year, operating performance was a little soft as the company cut its full-year earnings outlook to $3 per share, while net debt was reduced to $1.3 billion. , on par with the company’s EBITDA performance. With stocks trading at $100 by the end of 2021, the resulting 33x earnings multiple and 1x leverage meant valuations were still stretched. With leverage reduced, the company announced a $580 million deal to acquire mouthwash company TheraBreath in a deal adding $86 million in sales, just a side deal for the size of the company.
As pro forma net debt increased to $1.9 billion and I sat on 25% gains in just six months, I was tempted to take profits despite the long term track record of the business, as the valuation revaluation was more than pronounced despite weaker operational performance.
Amid a tough 2020, shares of Church have fallen again, falling from $100 to $81 at the time of writing. As it turned out earlier this year, the company grown up 2021 sales increased from $4.9 billion to $5.2 billion, with operating profit increasing from $1.03 billion to $1.08 billion, as GAAP profit increased by twenty cents to $3.32 per share, though that adjusted earnings came in at $3.02 per share. Net debt was just $1.6 billion, with EBITDA of $1.3 billion, translating into very modest leverage ratios.
The company is on track for modest growth in 2022, with organic sales growth up 3-6%, as reported growth was two points higher. Earnings were seen between $3.14 and $3.26 per share amid inflationary headwinds. With worsening inflationary trends and slowing growth hurting the business, the company To cut the organic growth rate at 3-4% after the publication of the second quarter results, the announced sales growth expected to slow to 4-5% amid a strong dollar, weighing on profits. The company now says adjusted earnings are flat for the year, while net debt fell slightly to $1.5 billion despite reaching a deal last year.
With 246 million shares trading just above the $80 mark, Church now commands a valuation of $20 billion, or $21.5 billion when considering net debt. This values the operations at around 4 times sales and 16 times EBITDA, a multiple still quite demanding given the evolution of interest rates and the fact that growth is quite lackluster.
A bolted agreement
With well-controlled leverage, Church announcement his next deal bolted in September. Church announced the purchase of the Hero Mighty brand, an acne treatment product in a $630 million deal. The deal is expected to add some $115 million in sales, indicating the deal has a valuation greater than 5.5 times sales. The $45 million contribution to EBITDA translates to very high margins of 40%, roughly double Church’s, as the resulting 14x EBITDA multiple looks a bit cheaper compared to to Church thanks to the upper margin profile.
This is a truly bolt-on deal, as pro forma leverage is very much under control. The problem is that earnings power is probably stable at $3 per share for a while and shares have fallen to $80, it still works out to a multiple of 26-27 times earnings, and still has an effect very manageable leverage. Amidst all this lure is growing a bit, but given the uncertainty and higher interest rate environment, it’s too early to step in despite a typical strong deal the company just announced. .