skynesher
In the final days of 2021, I called Church & Dwight (NYSE:CHD) a great brand portfolio for all portfolios. The company has seen a tough and challenging 2021 amidst tough comparables following the pandemic. As the company deleveraged the balance sheet and announced another bolt-on deal, appeal was on the horizon in the long run, yet the valuations were still full.
Recap
Church & Dwight is a conglomerate of so-called power brands in an effort to create a diversified, asset-light, high margin and high growth consumer product empire. Ahead of the pandemic, Church posted a 5% increase in 2019 sales to $4.4 billion with EBITDA trending around a billion and adjusted earnings coming in around $2.50 per share, while leverage came in around 2 times EBITDA. With shares trading near the $90 mark, valuations were very demanding.
The company has seen solid organic growth in the wake of the pandemic, with sales increasing around the double-digit mark. As it turned out, 2020 revenues rose 12% to $4.96 billion as operating profits rose to $1.03 billion and adjusted earnings rose to $2.83 per share, as net debt fell just below the $2 billion mark. The company guided for another 6-8% revenue growth in 2022 with earnings per share seen around the $3 per share mark, or just a few pennies above that mark.
During the year, operating performance has been a touch soft as the company cut the full year earnings outlook to $3 per share, all while net debt was cut to $1.3 billion, at par with the EBITDA performance of the business. With shares trading at $100 by the end of 2021, the resulting 33 times earnings multiple and 1 times leverage made that valuations were still demanding. With reduced leverage being a fact the company announced a $580 million deal to acquire TheraBreath a mouthwash business in a deal adding $86 million in sales, just a bolt-on deal for the size of the company.
As pro forma net debt was increasing to $1.9 billion and myself sitting on 25% gains in the time frame of just six months, I was tempted to take some profits despite the long-term track record of the firm, as the valuation re-rating has been more than pronounced despite softer operating performance.
Struggling Along
Amidst a tough 2020, shares of Church have come down again, having fallen from $100 to $81 at the moment of writing. As it turned out earlier this year, the company grew 2021 sales from $4.9 billion to $5.2 billion, with operating earnings up from $1.03 billion to $1.08 billion as GAAP earnings rose twenty cents to $3.32 per share, albeit that adjusted earnings came in at $3.02 per share. Net debt only stood at $1.6 billion, with EBITDA posted at $1.3 billion, translating into very modest leverage ratios.
The company guided for modest growth in 2022, with organic sales growth seen up 3-6%, as reported growth was seen two points higher. Earnings were seen between $3.14 and $3.26 per share amidst some inflationary headwinds. With inflationary trends worsening and slower growth hurting the business, the company cut the organic growth rate to 3-4% following the release of the second quarter results, with reported sales growth set to slow down to 4-5% amidst dollar strength, weighing on earnings. The company now says adjusted earnings flat for the year, all while net debt inched down to $1.5 billion despite last year’s bolt-on deal making.
With 246 million shares trading just above the $80 mark, Church is now commanding a $20 billion valuation, or $21.5 billion if we factor in net debt. This values operations at around 4 times sales and at 16 times EBITDA, still a somewhat demanding multiple given where interest rates have moved and the fact that growth is quite lackluster.
A Bolt-On Deal
With leverage very much under control, Church announced its next bolt-on deal in September. Church announced the purchase of Hero Mighty brand, an acne treatment product in a $630 million deal. The deal is set to add some $115 million in sales, indicating that the deal comes at a premium valuation at 5.5 times sales. The $45 million EBITDA contribution translates into very steep margins of 40%, roughly double those of Church as the resulting 14 times EBITDA multiple looks a bit cheaper compared to Church on the back of the superior margin profile.
This is a truly bolt-on deal as pro forma leverage is very much under control. The issue is that earnings power is likely flat at $3 per share for a while and while shares have fallen to $80, this still works down to a 26-27 times earnings multiple, all while leverage is still very manageable. Amidst all of this appeal is increasing a bit, yet given the uncertainty and higher interest rate environment, it is too early to jump in despite a typical and solid bolt-on deal just announced by the business.
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