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.
Conclusion
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.
Notes
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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