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Church & Dwight (CHD) Up 4.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Church & Dwight (CHD - Free Report) . Shares have added about 4.1% 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 Q4 Earnings Miss by a Penny, Up Y/Y

After eight straight quarter of earnings beat, Church & Dwight Company, Inc. reported a negative earnings surprise of 1.7% in the fourth quarter of 2018.

Management now expects earnings in the band of $2.43-$2.47 per share, which is below the current Zacks Consensus Estimate of $2.48. However, full year earnings reflect year-over-year growth of 7-9%. This will be backed by higher operating income. Further, this was the sixth consecutive quarter of positive sales surprise. Notably, both the top and bottom lines continue to improve year over year.

Management pointed that the Consumer Domestic business posted solid volume growth, while pricing remain favorable. Moreover, total organic sales growth exceeded the company’s projection.

Quarter in Detail

Church & Dwight posted fourth-quarter adjusted earnings of 57 cents per share that missed the Zacks Consensus Estimate by a penny but improved 9.6% from the year-ago period primarily driven by higher net sales. Further, the effective tax rate in the quarter under review was 18.9%, down from 33.2% in the same period last year.

The company reported net sales of $1,074.4 million that advanced 4% year over year and surpassed the Zacks Consensus Estimate of $1,066.4 million. Results were backed by continued category growth and healthy market share gains. Markedly, the company witnessed improvements in 11 of 14 domestic categories.

Organic sales rose 4.3%, surpassing management’s guidance of 3% growth. This, in turn, was fueled by volume growth of 2.7% as well as positive product mix and pricing of 1.6%.

Gross margin contracted 250 basis points (bps) to 44.1% on account of rise in input costs, adverse impact of U.S. tariffs related with Waterpik and increased incentive compensation. This was partially offset by favorable pricing and volume as well as productivity programs.

Further, marketing expenses increased 4.8% to $126.4 million. As a percentage of sales, it increased 10 bps to 11.8%. SG&A expenses were $154.5 million, depicting a rise of almost 5.7%. As a percentage of sales, SG&A expenses escalated 30 bps to 14.4% due to IT and R&D investment expenditure and higher incentive compensation. Income from operations for the period came in at $193.4 million, down 9.9%, while operating margin contracted 290 bps to 17.9%.

Segment Details

Consumer Domestic: Net sales in this segment were up 4% to $819.5 million, courtesy of higher household and personal care sales. Organic sales improved 4%, benefiting from a 2.2% increase in volume, and 1.8% positive impact from price and product mix. The main growth drivers in this segment were WATERPIK oral care products, ARM & HAMMER clumping cat litter, ARM & HAMMER liquid and unit dose laundry detergent, BATISTE dry shampoo, VITAFUSION and L’IL CRITTERS gummy vitamins, and OXICLEAN stain fighters.

Consumer International: Net sales in the segment grew 5% to $178.6 million, backed by recent buyouts, broad-based sales growth for household and personal care products, and improvements in export business. Organic sales increased 9%, driven by volumes rise of 8.9% and favorable price and product mix of 0.1%. Impetus to organic sales was mainly provided by BATISTE, FEMFRESH, ARM & HAMMER dental care, and NAIR in the export business, ARM & HAMMER clumping cat litter and liquid laundry detergent in Canada, ARM & HAMMER liquid laundry detergent, TROJAN and OXICLEAN in Mexico and Waterpik in several countries.

Specialty Products: Sales in this segment rose 1.5% to $76.3 million. Organic sales slipped 3.7%, on account of an 6.4% drop in volumes, somewhat cushioned by favorable broad-based pricing of 2.7%. Further, management stated that demand for poultry products remained strong. However, 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 $316.7 million, long-term debt of 1,508.8 million, and total shareholders’ equity of 2,453.8 million. In 2018, the company generated cash flow from operations of $763.6 million and incurred capital expenditure of $60.4 million. Additionally, the company increased the quarterly dividend by 5% to 22.75 cents per share. Management expects cash from operations to be around $800 million for 2019.

Guidance for 2019

Church & Dwight remains on track to retain its impressive organic sales growth trend in 2019, backed by its solid product launches and investments. Also, price increases on nearly 30% of the company’s portfolio is likely to have a favorable contribution toward gross margin expansion. Management pointed that pricing in personal care categories as well as lower promotions in the laundry category will also contribute to margin improvement.

That said, the company expects 2019 to be a solid year, wherein it anticipates sales growth to be roughly 3.5%, reflecting an increase of 2.5% at domestic, 6% at international and 9% at Specialty Products. This is expected to be driven by strength across all three segments effective product launches.

Gross margin is likely to increase 35 bps (excluding U.S. tariff impacts) or up 10 bps including the same. Notably, management expects gains from pricing and productivity to compensate for elevated commodity and transportation costs, as well as impacts from U.S. tariffs. Operating margin growth is expected to fall in line with Church & Dwight’s Evergreen model (up 50 bps), primarily fueled by lower SG&A costs.

Q1 Outlook

For the first quarter of 2019, management now anticipates sales growth of approximately 3.5-4% on a both reported and organic basis. Earnings are projected to be 66 cents per share, reflecting a year-over-year increase of 5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Church & Dwight has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Church & Dwight has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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