Why You Should Be Avid About This Company's Future

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On Oct. 1 of this year Church & Dwight (NYSE: CHD) closed its acquisition of chewable vitamin maker Avid Health. The deal marks the company’s largest purchase to date. The company went over the acquisition’s details in its most recent quarterly conference call (for all of the highlights from Church & Dwight’s third quarter conference call, click here).

Not to be outdone, Procter & Gamble (NYSE: PG) recently acquired vitamin maker New Chapter in an effort to expand its brand portfolio into the quickly growing vitamin, mineral, and supplements market. New Chapter is significantly smaller than Avid Health, but with P&G at the helm, now represents a potential threat to Church & Dwight’s newest acquisition.

Meanwhile, competitor Kimberly-Clark (NYSE: KMB) is focused on its portfolio of personal, feminine, and child care brands. However, a vitamin and supplement brand would complement the company’s portfolio quite well, as it’s already a leader in personal health. With P&G’s and Church & Dwight’s recent acquisitions, I believe that new competition from Kimberly-Clark may not be far off.

Let’s take a look at how Church & Dwight’s newest brand will affect the company’s financials.

Balance Sheet

Church & Dwight paid $650 million to purchase Avid Health. The company primarily financed the deal with $400 million of new debt in the form senior notes at a coupon rate of 2.875, and commercial paper. Unfortunately, the new debt will cut into Church & Dwight’s impeccable balance sheet. Here’s how the company now stacks up against the competition.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Debt/ Equity</strong></p> </td> <td> <p><strong>Long-Term Debt to Capitalization</strong></p> </td> </tr> <tr> <td> <p>Church & Dwight</p> </td> <td> <p>0.87</p> </td> <td> <p>81.6%</p> </td> </tr> <tr> <td> <p>Procter & Gamble</p> </td> <td> <p>1.11</p> </td> <td> <p>82.0%</p> </td> </tr> <tr> <td> <p>Kimberly-Clark</p> </td> <td> <p>2.50</p> </td> <td> <p>38.2%</p> </td> </tr> </tbody> </table>


Church & Dwight boast an industry leading debt/equity ratio, despite the 0.30 point bump the company took from the addition of $400 million in debt. The company’s long-term debt to capitalization ratio is in line with industry leader Procter & Gamble, leading me to believe this is quite an acceptable amount of debt for the company to take on. It should be noted, though, that these are very different amounts of debt for each company. Whereas P&G has a market capitalization of $187 billion, Church & Dwight is much smaller at just $7 billion.

Additionally, the company’s history of strong free cash flow indicates its ability to pay down the debt obligation easily while continuing to raise its dividend and put new products on the shelves. Church & Dwight currently pays a dividend of $0.96, or 1.9% annually. Its payout ratio is just under 40%. Comparatively, P&G’s and Kimberly-Clark’s payout ratios are about 57% each.

From a balance sheet perspective, the company is easily strong enough to take on new debt to finance the acquisition.

Earnings

The vitamin, mineral, and supplement category of consumer goods is one of the fastest growing in the industry, with historical steady growth between 5% and 6%. Avid Health’s position as the leading gummy vitamin manufacturer is quite strong. They have the leading children’s gummy vitamin, and the fastest growing brand in adult gummy vitamins. Overall, Avid commands a two-to-one market share lead over its closest competitor.

Currently, both the adult and children gummy markets generate about $150 million in revenue. That represents 58% of children vitamin sales, but only 3% of adult vitamin sales. There is a huge opportunity for Church & Dwight to grow adult gummy vitamins. In fact, gummy vitamins are the fastest growing segment of both adult and children vitamins.

Additionally, Avid produces a better product than its competition. The taste profiles of Avid’s gummies have won numerous awards. As a result, the company tripled its sales in the last three years. If trends continue and Church & Dwight is able to give Avid’s products the marketing push they intend, the company could easily meet estimates of $0.06 per share in accretion.

I foresee Avid having an even more significant impact on earnings as gummy vitamins completely take over the kids vitamin market in the future. Controlling a huge portion of one of the fastest growing markets in consumer packaged goods will undoubtedly generate exceptional profits for the company.


adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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