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Small but Growing: Church & Dwight Could Be the Next Procter & Gamble

Church & Dwight (CHD) is a consumer product manufacturer, with a lineup of famous brands such as Arm & Hammer. The firm's eight core brands--Arm & Hammer, Xtra, Trojan, OxiClean, First Response, Spinbrush, Nair, and Orajel--account for more than 80% of its annual sales and profits. Church & Dwight generates about 80% of its revenue from the United States.


Church and Dwight (CHD) is a relatively small player in the consumer product industry, about 30 times smaller than Procter & Gamble (PG).

However, what it lacks in size, it makes up for in growth. Its 10-year average growth rate has amounted to 12.5% (vs. 7.1% for Procter & Gamble). Although product innovations and line extensions have contributed to the firm's sales growth during the past ten years, acquisitions have been more important to its bottom-line. CHD was mainly a household product company, but after a series of acquisitions the company has shifted to the point where nearly 30% of its sales now come from personal-care products, which commands a better margin profile. This has played a major role in improving CHD overall profitability .


In the meantime, the company has doubled its dividend payout ($0.17 to $0.34 per year). We expect the company to maintain its discipline in seeking margin enhancing acquisitions that are EPS accretive in year one. CHD expressed confidence that new product innovation and distribution gains position the company well to deliver on its 3-4% organic revenue growth target for 2011.


Based on the valuation table, CHD appears a bit overpriced compared to its peers but still cheap compared to its historical range. Obviously the market is very confident that CHD will outperform its peers. JNJ appears to be trading at a cheap historical forward P/E valuation, however, we know it has had some trouble in recent quarters. P&G appears to be trading close to the middle of its historical range.


Why do we like CHD?

- Valuation: In two year it will be trading close to its historical foward P/E valuation so there is room for appreciation.
- It has firepower to acquire accretive assets, which is a catalyst for the stock price.
- It is possibly itself a target for an acquisition.
- The company will grow organic sales faster than the competition.
- The more it grows, the more leverage it has against Wal-Mart (WMT) (20% of revenues).


Risks to our target include:

- The potential for CHD to miss its organic revenue growth targets.
- Execute accretive acquisitions.
- Generate significant negative EPS surprise.
- Wal-Mart is a threat to its CHD's pricing power.

For me, the million dollar question is which company will CHD acquire?
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