Summary
- Church & Dwight manufactures and markets cleaning, household, and lifestyle products.
- The company’s FLAWLESS acquisition will boost its top and bottom lines in 2019 and beyond.
- Church & Dwight’s gross margin may be under pressure due to rising commodity and transportation costs.
- Its shares are richly valued and trade at a forward P/E ratio of nearly 30x.
Investment Thesis
Church & Dwight (CHD) delivered a solid Q1 2019 with strong top and bottom lines growth. The company’s FLAWLESS acquisition should help boost its top and bottom lines in 2019 and beyond. However, we expect gross margin pressure to continue in H2 2019 and beyond due to expected increase in commodity and transportation costs. In addition, competition from its peers will limit price increases in 2019. Church & Dwight pays a growing dividend. However, its shares are trading at a premium valuation already. We think investors should wait for a pullback before initiating a position.
Data by YCharts
Recent Developments: Q1 2019 Highlights
Church & Dwight posted a solid Q1 2019 with organic sales growth of 4.5%. This sales growth was driven by its domestic sales (represents over 80% of its total revenue). As can be seen from the table below, its domestic sales grew by 4.5% year over year. (organic growth). The company was able to expand its gross margin by 20 basis points to 45.1%.
Source: Q1 2019 Earnings Release
Earnings And Growth Analysis
Higher commodity and transportation costs may continue to be its headwinds
Thanks to its ability to increase prices, Church & Dwight saw its gross margin expanded by 20 basis points year over year to 45.1% in Q1 2019. This margin expansion was partially offset by higher commodity and manufacturing cost. In its latest conference call, management indicated that commodity costs (e.g. resin, oil diesel, surfactants, etc.) are not abating any time soon and it is up year over year. In fact, management believes that they are still a long way from a commodity down cycle as the oil price remains pretty steady.
Management thinks that the rising commodity price will continue to negatively impact its gross margin. In addition, rising transportation cost is another big factor that will impact Church & Dwight’s gross margin. The record low unemployment rate in the U.S. will make it difficult to contain its transportation cost in 2019 and perhaps even into 2020. In fact, management believes that transportation cost will continue to grow by mid-single digits in 2019.
