Church & Dwight Earnings: A Moat Remains Elusive Despite Recent Sales and Margin Gains

On the surface, no-moat Church & Dwight’s CHD second-quarter marks (5.4% organic sales growth and 270 basis points of gross margin expansion to 43.9%) might suggest the firm is finally turning the page on what has been a challenging operating landscape. Recall, its discretionary brands (Flawless, WaterPik, and VitaFusion, about 20% of sales) have faltered of late, as consumers have turned their backs on these categories as they’ve worked to rationalize unnecessary spending. But we’d suggest that even the other 80% of its mix includes categories (depilatories, condoms, pregnancy tests) that cash-constrained consumers might opt to forgo (with management citing that just six of its 14 power brands in the U.S. gained share in the quarter), weakening its ability to raise prices to offset the inflationary angst it continues to face.

When juxtaposed with the lagging scale, resources, and negotiating power that Church maintains relative to its larger, competitively advantaged peers (Procter & Gamble, Colgate, Unilever, and Reckitt), we view its standing as unenviable, underpinning our assessment that it has failed to carve out a competitive edge. In a sector characterized by nonexistent switching costs, we think Church could easily fall victim to pressure from competitors and retailers, impeding its financial prospects, which we don’t think the market appreciates. In this context, shares trade nearly 60% above our $61 fair value estimate (which we don’t expect to change outside of a low-single-digit bump for time value). We estimate such lofty levels suggest nearly 7% average annual sales growth over the next 10 years with operating margins approaching 25% by fiscal 2032. This towers above our long-term expectations (3% and 21%, respectively) and its historic averages (3.9% and 19.5%, respectively). And while management ticked up its organic sales growth (to 5%, from 3%-4%) and adjusted EPS forecast (6% versus 2%-4%), our preprint marks already square with its revised targets.