CHD - Church & Dwight

[ccplz]

From $0.67 EPS in 2003 to $2.79 in 2013, generating 400 mil+ in FCF a year with minimal maintenance capex requirements, leading brands in a number of product categories.

 

EPS has grown at double digit rates for the past 15 years. If we use a discount rate of 8% and a 20x multiple for terminal value and assume that FCF can grow at 10%a year for the next 6 years, it would be worth 14 billion, which is a 40% premium to current prices. Seems like a no-brainer to me.

 

Anyone else looking at this PnG lite?

[thefatbaboon]

I've looked at this before, great company, but too expensive for me. 

[HJ]

Think they are better than P&G light.  Impressive track record since the current management took over.  A more focused version of P&G would be the better characterization.  The big difference is they are almost pure domestic US.  But then again in this environment it may be a plus rather than a minus. 

 

I've always wondered how a P&G got to where it is today, and whether CHD has it in its DNA to get to the next level.  They've done all the right things over the past 20 years.  If they can continue that for another 20, paying 25x may be just fine.

[Cunninghamew]

From $0.67 EPS in 2003 to $2.79 in 2013, generating 400 mil+ in FCF a year with minimal maintenance capex requirements, leading brands in a number of product categories.

 

EPS has grown at double digit rates for the past 15 years. If we use a discount rate of 8% and a 10x multiple for terminal value and assume that FCF can grow at 10%a year for the next 6 years, it would be worth 14 billion, which is a 40% premium to current prices. Seems like a no-brainer to me.

 

Anyone else looking at this PnG lite?

 

I might be having a big brain fart this morning (or I am just dumb), but I don't see how you got to $14 billion using those numbers.

 

The NPV of your FCF stream (starting at $400mm and growing 10%) would be $2.5 bill over 6 years. The terminal value would be just north of $7 billion. 

 

Agree, that CHD is an awesome company and Trojans offer a Margin of Safety

 

 

[Guest Schwab711]

Think they are better than P&G light.  Impressive track record since the current management took over.  A more focused version of P&G would be the better characterization.  The big difference is they are almost pure domestic US.  But then again in this environment it may be a plus rather than a minus. 

 

I've always wondered how a P&G got to where it is today, and whether CHD has it in its DNA to get to the next level.  They've done all the right things over the past 20 years.  If they can continue that for another 20, paying 25x may be just fine.

 

Completely agree that they are better than P&G. I love CHD but have yet to buy in. I think paying 25x earnings might not be crazy at all. Here is an example from a paper I'm working on that shows what P/E you can buy at for a stock growing operating earnings at 15% compounded relative to a stock growing earnings at 6.67% (no dividends). The P/E you see in yellow shows what P/E you could pay for the high-growth stock while still maintaining 6.67% realized returns.

 

The assumption is you can buy an average stock (6.67% earnings growth) at 10x P/E, what would you be willing to pay for a better company depending on holding period. No matter what P/E you buy for, if both grow at 15% and 6.67% compounded forever, you can never overpay for the 15% growth on a relative basis (but you may be dead before you make a relative profit). I'm a huge fan of CHD's businesses and I see long-term growth here!

[KCLarkin]

No matter what P/E you buy for, if both grow at 15% and 6.67% compounded forever, you can never overpay for the 15% growth

 

Mathematically, 15% growth is not sustainable forever. What is causing this growth and what are the forces that will push it back towards average? How long can the company avoid competitive forces and inevitable saturation?

 

If CHD can sustain 15% growth for even 10 more years, it is a massive bargain at 25x. If it reverts to 6.67% growth, it is probably still worth 20x.

 

By the way, if you can buy an average stock that will grow 6.67% forever at a 10x P/E you should buy every share you can. Anything selling at 10x is either well below average or has murky prospects.

[frommi]

If we use a discount rate of 8% ...

 

Why not 10% or 5%? With a DCF you can make any stock look like a bargain with the right numbers. With the current valuation you will not get more (or slightly less) than the growthrate of the earnings+dividend as a return. Nothing wrong with that, but it may be hard to beat the market that way.