What Makes Church & Dwight a Good Buy

By Sandeep Gupta - September 13, 2012 | Tickers: CHD, CL, KMB, PG, CLX | 0 Comments

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Church & Dwight (NYSE: CHD) has significantly outperformed its peer group of Kimberly-Clark Corporation (NYSE: KMB), Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL) and The Clorox Company (NYSE: CLX), and has posted a double-digit annual growth over the last five years. The following chart summarizes the growth of these companies over the last five years.

Church & Dwight has clearly demonstrated its ability to continue to grow profitably in a challenging operating environment with its value portfolio, efforts to expand into new whitespace categories, and focus on cost-savings initiatives. Moreover, the company recently signed a definitive agreement to acquire Avid Health, the leader in gummy form vitamins and supplements, for $650 million in cash. In my view, though Avid Health is outside the company's core competency, it presents a strong growth opportunity. Given the management's strong track record in integration of past acquisitions, I am not overly concerned by the risk associated with entering a new business segment.

The shares have already gained ~3% following the acquisition announcement. As a result, the company's already premium valuation to its peer has further expanded. But does Church & Dwight really deserve such a high valuation? Let's compare the growth prospects and forward P/E of Church & Dwight with Kimberly-Clark, Procter & Gamble, Colgate and Clorox.

Source: Yahoo Finance

Thus, Church & Dwight clearly seems to justify its premium valuation as it offers better growth prospects than its peers and is the only company offering annual double digit growth over the next 5 years. Further, the acquisition of Avid Health is a good addition to the portfolio and offers good long term rewards. The following are the key positives of this acquisition.

Entry to Fast-growing vitamin & mineral category

The vitamin and mineral category market is estimated to be around $5 billion. This category is one of the fastest-growing segments in consumer packaged goods with a 5-6% historical growth rate. Thus, acquisition of Avid is a huge positive as Avid is the only manufacturer to focus exclusively on gummy vitamins, which has been the fastest-growing segment of the fast growing vitamin category. With a strong hold of L'il Critters in kid's category & Vitafusion in adult's category and a dominant market share in the gummy vitamins market, I believe the company is well positioned to continue to post good topline growth in this category for long term.

Long-term opportunity in adult vitamin market

Avid's sales are 50/50 split between its adult products (Vitafusion) and its children's vitamins (Li'l Critters). Gummy vitamins to adults currently accounts for only 3% of adult vitamin sales (while 58% of children's vitamins are sold in gummy-form). Thus gummy-form (in adult products) offers a huge untapped opportunity as the adult category is about 16 times the size of the children's segment and is rapidly growing as an aging population take more vitamins to improve health. I believe the company's initiatives like co-branding and improved marketing will increase the penetration of the faster growing adult segment.

Positive Synergies

Though, the integration of Avid will have a negative impact on gross margins as Avid's gross margins are Church & Dwight's gross margins, but the company with its existing retail relationships and sales force will help Avid sales grow double digits for the next several years. With the majority of synergies ($15 million targeted) expected through COGS, management sees the opportunity for substantial gross margin improvement and projects 400 bps of expansion by 2014.

I believe Church & Dwight is one of the best run companies in the household and personal care sector. Innovation, new product development and a strong hold of its household and personal products, such as Arm & Hammer, First Response, Nair, OxiClean and Trojan, will continue to drive good results for the company. Moreover, by entering the large and rapidly growing Vitamin category, Church & Dwight has opened up significant and sustainable new revenue opportunities. The acquisition of Avid Health should alleviate investor concerns that 2013 could be below par earnings year. Hence, I am bullish on this stock and suggest investors to look beyond its premium valuation.

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