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Why Is Church & Dwight (CHD) Down 3% Since the Last Earnings Report?

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It has been about a month since the last earnings report for Church & Dwight Company, Inc. (CHD - Free Report) . Shares have lost about 3% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Church & Dwight Tops Q2 Earnings, Sales Miss Estimates

Church & Dwight posted mixed results in the second quarter of 2017, wherein while earnings beat the Zacks Consensus Estimate, revenues missed the same as the segments reported slower-than-expected growth due to continued discounting.

Adjusted earnings (excluding charges related to U.K pension termination) of 41 cents per share beat the Zacks Consensus Estimate of 39 cents by 5.1%. In fact, earnings outpaced the Zacks Consensus Estimates in 11 out of the last 14 quarters, including the current one. Adjusted earnings, however, declined 4.7% from the year-ago period and were below management’s estimated growth of 5%. Higher promotional expenses pressured margins.

Quarter in Detail

The company reported sales of $898.0 million in the second quarter. Sales marginally lagged the Zacks Consensus Estimate of $904 million by 0.7% but grew 2.3% from the prior-year quarter on the back of acquisitions. We note that sales outpaced the Zacks Consensus Estimates in 12 out of the last 15 quarters, including the current one. Further, sales growth also outpaced the company’s expected range of 1-2%.

Organic sales inched up 1.8% from the prior-year quarter, which was within the company’s range of 1–2% as higher volumes of 6.2% were offset by 4.4% higher promotional investments. Strong growth in International and Specialty Products business continued to boost sales in the quarter. However, sales growth in Consumer Domestic segment was dented by decline in Personal Care Products category. Organic growth in the second quarter was weaker than the preceding quarter’s growth of 2.3%.

Gross margin declined 80 basis points to 45.7% due to planned increased promotion and coupon investments in the domestic business. Adjusted operating margin declined 190 basis points to 18.1% in the quarter, due to higher SG&A ratio and lower gross margin.

Segment Details

Consumer Domestic: Segment net sales increased 1.3% to $678.2 million, while organic sales was down 0.1% as 6.2% higher volume growth was overshadowed by a decline of 6.3% related to higher promotional investments.

ARM & HAMMER liquid and unit dose laundry detergents, OXICLEAN laundry detergent and stain fighters, BATISTE dry shampoo and ARM & HAMMER cat litter was offset by declines in XTRA laundry detergent, FIRST RESPONSE pregnancy test kits and TROJAN condoms.

Consumer International: Segment net sales grew 6.4% to $145.1 million. Organic sales increased 7.4% driven by broad based household and personal care sales. While volume increased 6.8%, favorable product mix and pricing added 0.6% in the quarter.

FEMFRESH and BATISTE in the export business, ARM & HAMMER liquid laundry detergent, STERIMAR and OXICLEAN Stain Fighter Gel in Mexico and BATISTE, VITAFUSION and FEMFRESH in Australia, all added to the strong sales growth.

Specialty Products: The segment sales showed an increase of 4.9% to $74.7 million. Organic sales surged 9.4% backed by higher volumes and strong pricing in the animal productivity business. Encouragingly, milk prices and U.S. dairy farm profitability remain at a higher level than a year ago.

Other Financial Update

Church & Dwight ended the quarter with cash and cash equivalents of $237.6 million, long-term debt of $894.1 million, and total shareholders’ equity of $1,848 million.

In the first half of 2017, the company generated cash flow from operations of $249.3 million and incurred capital expenditure of $10.4 million. For 2017, management expects adjusted free cash flow to exceed adjusted net income. The company expects to generate over $1.8 billion in free cash flow over the next three years.

Guidance for 2017

Church & Dwight remains optimistic about its future performance on the back of a stable portfolio of value and premium products, launch of new and innovative products, aggressive productivity programs and tight management of overhead expenses, along with robust sales and earnings growth. However, it also expects a competitive environment in 2017 due to new product introductions by competitors and persistent pricing pressure. The company expects rising commodity costs and foreign currency headwinds to prevail in 2017.

The company continues to expect reported and organic sales growth of approximately 3% for 2017 driven by innovations. Further, it anticipates adjusted gross margin expansion of 40 bps year over year, despite rising commodity costs and currency headwinds. Also, operating margin is estimated to improve nearly 30 bps (40 bps expected earlier), on adjustment for pension settlement cost and Brazil charges. Considering all these factors, management envisions adjusted earnings per share in 2017 to grow by 8.5%. Excluding negative currency impact of 1%, the company forecasts adjusted earnings to grow 9.5% for 2017.

Third-Quarter Outlook

For the third quarter, the company expects reported and organic sales growth of 3.5%, with approximately 3% growth coming from the domestic business. The company expects adjusted earnings of 46 cents in the third quarter including 2 cents of net dilution from Water Pik acquisition expenses.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in  fresh estimates. There have been 11 revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 10.3% due to these changes.

VGM Scores

At this time, Church & Dwight's stock has a subpar Growth Score of D, though its Momentum is doing a bit better with a C. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for momentum investors based on our style scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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