Church & Dwight: Clean up With Household Products

07/22/2020 5:00 am EST


John Staszak

Securities Analyst: Consumer Discretionary & Consumer Staples, Argus Research Corporation

We are launching coverage of Church & Dwight Co. Inc. (CHD), a manufacturer of household and personal care products, with a "buy" rating, explains John Staszak, an analyst with the leading independent Wall Street firm, Argus Research.

The company’s brands include Arm & Hammer, OxiClean, VitaFusion, Simply Saline, Nair, XTRA, Flawless, Waterpik, and Oragel. Its top eight brands account for 80% of sales and EPS.

Until the COVID-19 pandemic fades -- and potentially after -- we expect relative outperformance in certain shelter-at-home categories, including groceries, processed foods, beverages, home goods and personal items.

We expect the company’s recent earnings momentum to continue in 2020-2021, with help from aggressive marketing, increased R&D spending, and new product launches.

We also expect margins and earnings to benefit from the continued integration of acquired businesses, and believe that rising demand for CHD cleaning products will outweigh increased spending on measures to protect employee health.

Like other Consumer Staples companies, Church & Dwight benefited from COVID-19-related pantry stocking in 1Q20. Cat litter, detergent, laundry, and vitamins were strong sellers as consumers sheltered in place and stocked up on cleaning and personal health products.

We expect demand for these products to remain strong due to the continuing pandemic and look for 6% revenue growth this year.

At the same time, we expect the company to face higher operating costs due to COVID-19, particularly labor, maintenance and safety expenses — though most of these costs will occur in 2Q20.

Our full-year operating margin estimate, based on our expectations for favorable operating leverage and higher selling prices, is 21%. Over the long term, we expect the operating margin to expand to 23% even with higher marketing spending.

Reflecting the impact of COVID-19-related sales in 1Q20 and recent positive earnings surprises, along with productivity improvements and strong results early in the second quarter, we are setting an above-consensus 2020 EPS estimate of $2.80. We are also setting a 2021 estimate of $3.00, above the consensus of $2.91.

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