A month has gone by since the last earnings report for Church & Dwight (CHD - Free Report) . Shares have added about 2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Church & Dwight due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Church & Dwight Q3 Earnings Top Estimates, Sales Up Y/Y
Church & Dwight posted solid third-quarter results, with top and bottom lines growing year over year and beating the Zacks Consensus Estimate. This marked the company’s eighth and fifth consecutive quarter of positive earnings and sales surprise, respectively. Further, the company updated its view for 2018 alongside issuing an outlook for the fourth quarter.
Quarter in Detail
Quarterly adjusted earnings of 58 cents per share have surged 18.4% from 49 cents reported in the third quarter of 2017. Also, the bottom line topped the Zacks Consensus Estimate of 54 cents. The bottom-line performance was backed by higher sales. Further, the effective tax rate in the quarter under review was 21.9%, down from 28.7% in the same period last year.
The company reported net sales of $1,037.6 million that advanced 7.2% year over year and surpassed the Zacks Consensus Estimate of $1,022 million. Results were backed by continued category growth and healthy market share gains. Markedly, the company witnessed improvements in 11 out of 15 categories.
Organic sales rose 4.7%, driven by 5.4% rise in global consumer products. This, in turn, was fueled by volume growth of 3.7% as well as positive product mix and pricing of 1.7%.
Gross margin contracted 100 basis points (bps) to 44.3% due to increased commodity and transportation expenses, which more than offset gains from favorable pricing and volume.
Further, marketing expenses increased 7.7% to $120.5 million. As a percentage of sales, it remained flat at 11.6%. SG&A expenses were $135.4 million, depicting rise of almost 5.9%. As a percentage of sales, SG&A expenses escalated 20 bps due to buyouts along with IT and R&D investment expenditure. Income from operations for the period came in at $204.2 million, reflecting 2.8% rise. Operating income margin contracted 80 bps to 19.7%.
Consumer Domestic: Net sales in this segment were up 7.6% to $ 784.9 million, courtesy of gains from acquisitions, and higher household and personal care sales. Organic sales improved 4.7%, benefiting from a 2.6% increase in volume, and 2.1% positive impact from price and product mix. Notably, seven out of 11 power brands delivered solid growth.
The main growth drivers in this segment during the quarter were ARM & HAMMER liquid and unit dose laundry detergent; VITAFUSION and L’IL CRITTERS gummy vitamins; XTRA laundry detergent; OXICLEAN stain fighters; and ARM & HAMMER clumping cat litter.
Management stated that in August the company entered an agreement with Shanghai Jahwa. Accordingly, Shanghai Jahwa will be the omni-channel distributor in Mainland China for Church & Dwight’s four categories namely toothpaste, baking soda, feminine hygiene and dry shampoo. This partnership reflects the company’s efforts to bolster presence in the Asia Pacific region.
Consumer International: Net sales in the segment soared 6.9% to $174.1 million, backed by recent acquisitions, broad-based sales growth for household and personal care products, and improvements in export business. Organic sales increased 8.3%, driven by volumes rise of 8.5%, partly offset by unfavorable price and product mix of 0.2%.
Impetus to organic sales was mainly provided by BATISTE, FEMFRESH in the export business, and VITAFUSION. In Canada, organic growth was mainly witnessed in VITAFUSION, BATISTE, and ARM & HAMMER clumping cat litter. Mexico witnessed robust growth in ARM & HAMMER liquid laundry detergent, baking soda, and dental care.
Specialty Products: Sales in this segment rose 3.6% to $78.6 million. Organic sales slipped 3.3%, on account of an 8.3% drop in volumes, somewhat cushioned by favorable broad-based pricing of 5%. Further, management informed that reduced milk prices have been leading to soft demand in the dairy industry.
Other Financial Updates
Church & Dwight ended the quarter under review with cash and cash equivalents of $188.3 million, long-term debt of $1,803.5 million, and total shareholders’ equity of $2,353.4 million.
In the first nine months of 2018, the company generated cash flow from operations of $568 million and incurred capital expenditure of $30.4 million.
In a separate release, the company announced a quarterly dividend of 21.75 cents per share, which is payable on Dec 3, 2018, to shareholders of record as of Nov 15.
Guidance for 2018
Innovation has been a key driver for Church & Dwight. As part of its long-term strategy to boost top and bottom lines, the company launched several products under various categories.
That said, the company continues to expect sales growth in 2018 to exceed 9%. Organic sales are anticipated to rise 4% now, up from 3.5% mentioned earlier. However, management expects gross margin to contract 120 bps. Marketing expenses (as a percentage of net sales) are expected to be more than 11.5%.
Further, the company envisions earnings per share of $2.27. Management earlier predicted the bottom line to be $2.26 to $2.28. The updated earnings view reflects year-over-year bottom-line decline of 22%. On an adjusted basis, earnings are expected to grow 17%.
For the fourth quarter of 2018, management forecasts net sales and organic sales to increase by 3% each. Earnings are projected at 57 cents per share, reflecting a year-over-year decline of 64% on a reported basis and 10% rise on an adjusted basis.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Church & Dwight has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Church & Dwight has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.