Thursday, 26 May 2016

Church & Dwight (CHD): Attractively Valued Despite First Appearances?

Is Church & Dwight (NYSE:CHD) attractively valued today? The flat answer from many people would be: "No." After all, with a historic PE nearing 28.5 and even a forward PE seeing it north of 25 in 2017 it is hard to come to that conclusion on first impressions:

Yet as my analyses of the company back in February and earlier this week on their Q1 2016 results on Seeking Alpha show, this is a quality company that certainly deserves a premium. As a result, it is hard not fall into the same opinion as a previous commenter on my February article:
This is one of those rare stocks that at least so far, you can buy pretty much anytime, and if you hold for a few years or more, you come out with a very nice rate of return.
Could it be, however, that despite first appearances it is an ideal time to pick up shares in this consumer defensive star? Here I take a look at three valuation methods and see what fair value prices come out of them. Let's get started.

1: Dividend Yield

Church & Dwight has never been a high yielder. Over the last five years it has averaged a dividend yield of just 1.64%:

Despite this, Church & Dwight is currently yielding less than it has done for some time at just 1.41% based on 2015 dividend:

Applying this 1.64% historic yield to the $1.35 dividend in 2015 would suggest a fair value of $82.55. Yet this does not tell us the whole story.

Future dividend potential is what really interests us though and Church & Dwight has been growing its dividend at a very rapid pace indeed. A $100 dividend income in 2011 has grown to $180 in 2015:

Analysts expect the dividend to grow to $1.42 per share in 2016. Applying the same 1.64% yield to this future dividend projection suggests a higher fair value of $86.83.

Consequently, based on dividend yield valuation Church & Dwight is currently noticeably overvalued.

2: PE Valuation

Church & Dwight's lofty valuation is not a new phenomena. Indeed, it has carried a high PE multiple for many years now. Averaging 24.88 over the last five years it has progressively expanded its PE by year's end since 2012:

Calculating our PE fair value we need to average the analyst consensus EPS predictions for the next two years ($3.53 and $3.81). Using this figure we then multiply it by the historic PE valuation Church & Dwight has recently attracted. Doing so offers us a PE fair value of $93.83.

Again, based on PE multiples Church & Dwight therefore looks a little expensive. Yet it is less so than from a dividend yield perspective.

3: EV/FCF Ratio

Looked at from a enterprise value to free cash flow perspective, however, Church & Dwight looks a little more moderately valued. Over the last five years it has averaged an EV/FCF valuation of 20.64:

20.64 appears a fair figure to me and, therefore, I will use this figure as my fair value EV/FCF valuation. This I then multiply using my predicted FCF per share figure. I calculate my predicted FCF figure by using a weighted historic FCF/Revenue figures (see my previous article for more detail on how). Using this gives me predicted FCF figures of $546 and $563 million. Averaging these and multiplying by the EV/FCF fair value figure provides us with a fair value of $87.37.

Yet this is based on a fair value FCF/Revenue ratio of 15.52%. Such a figure looks conservative in light of the fact that in 2015 the FCF/Revenue ratio was 16.02%. Similarly, at Q1 2016 (which I recently reviewed, see link at the start of this article) Church & Dwight had managed to boost this ratio even further to nearly 20%:

15.52%, therefore, seems too conservative to my mind. I am going to use 18% as a fairer reflection both of Church & Dwight's historical FCF/Revenue conversion and future potential based on Q1 2016 results. Doing so and using the previous 20.64 EV/FCF ratio suggests a potential FCF fair value of $101.33.

Church & Dwight, from this perspective, looks either overvalued or modestly undervalued depending on which FCF/Revenue you prefer.


Church & Dwight looks overvalued according to all but one of the valuation figures. Only the higher adjusted EV/FCF valuation metric presented Church & Dwight as currently trading below fair value. Looking at these figures all together presents an interesting collection of prices:

Church & Dwight, from this analysis, looks between 2% and 8.5% overvalued at present. Averaging the basic and adjusted prices would suggest a price of $90.96 as a compromise fair value.

All told, despite its massive attractions, Church & Dwight still looks fairly heftily overvalued judged by its recent history. Yet, should the price moderate to around $91 to $94 I would certainly be happy to open a small pilot position. Should it drop below the $88 mark, I'd be quite content to build up a fuller position. Church & Dwight remains a compelling consumer company with what appears to be robust long-term growth prospects. Yet if you don't already have a holding in the company, patience will have to be exercised for now to get a good entry price.

Unfortunately, that leaves me with the lingering fear highlighted by another commenter back in February:
I have read "overpriced" about this company for some years now. In the meantime, I've made some very good returns. Keep on waiting...
Hopefully I won't have to "keep on waiting" for a point where I am happy to open a holding in this appealing, growing consumer goods company.


Unless otherwise stated, all graphs and the calculations contained within were produced by the author.

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[Creative Commons image reproduced from Flickr user glenbledsoe.]

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