Church & Dwight Earnings: Despite Modest Volume Gains, Competitive and Macro Angst Loom Large

We don’t expect any change to our $61 fair value estimate (beyond time value) after dissecting no-moat Church & Dwight’s CHD third-quarter print, which included 4.8% organic sales growth. This was the first quarter of the last eight Church was able to eek out volume growth—to the tune of 2.7%, even as prices rose 2.1%—which could suggest its mix is winning with a cash-constrained consumer (as 40% of its portfolio is made up of value offerings). However, our enthusiasm is tempered as it was lapping dismal year-ago results, which included an 8.5% downdraft in volumes, as consumers turned their backs on Church’s more discretionary product lineup (WaterPik, VitaFusion, and Flawless).

As such, we aren’t wavering on our stance that against an intensifying competitive backdrop, Church could be left out in the cold. From our vantage point, its category exposure leaves it open to consumers trading down to lower-priced fare and/or avoiding its mix all together until their financial condition improves. Its standing is further compromised as it lacks the scale, resources, and negotiating prowess of its larger brethren (wide-moats Procter & Gamble, Colgate, and Unilever). Even as shares slipped around 7% on the news, the stock still trades at about a 40% premium to our intrinsic valuation; we think investors should leave Church & Dwight’s shares on the shelf.

From a profitability perspective, the firm realized 270 basis points of expansion at the gross margin line to 44.4%, though this lags the 45% marks that used to characterize the business prior to the pandemic. While we surmise that inflation will remain a headwind over the next several quarters (particularly as oil, resin, and labor costs have yet to abate), we don’t expect Church will opt for further price hikes, which could alienate penny-pinching consumers. Rather, we suspect the firm will favor scouring the business to unearth inefficiencies, which we see as prudent when married with continued brand investments.