EUR 850.00 For Business Accounts Only

Morningstar | Despite Recent Sales and Profit Gains, Competitive Angst Could Derail Church & Dwight's Trajectory

Church & Dwight boasts a stable of well-known household and personal-care products, such as Arm & Hammer, OxiClean, Trojan, and First Response. Its past growth has partly ensued due to efforts to extract costs to fuel investments in research, development, and marketing. As a result, the firm has chalked up impressive market share gains over a longer horizon and expanded the reach of its brand lineups. For one, Church has grown its share of First Response pregnancy tests from just 12% in 2001 to around one third of the market today. Further, the Arm & Hammer umbrella now extends beyond baking soda to include more than 12 categories--such as toothpaste, laundry detergent, and cat litter.Acquisitions have contributed to the firm's aggregate performance. At the turn of the century, Church & Dwight largely played in household products, but after a string of deals, its profile has shifted such that nearly 50% of consolidated sales now come from personal-care products like Orajel and Trojan, which tend to have more robust margins than its legacy household business. However, we don't think management is just looking to prop up growth but rather is maintaining capital allocation prudence in its pursuit of tie-ups, as it has sat on the sidelines for the better part of the past few years (outside of its deal for Water Pik a year ago, a leader in oral water flossers and replacement showerheads), stating the multiples being demanded by sellers have been unwarranted and/or targets didn't meet its stringent criteria.But an onslaught of challenges--intense competitive actions by peers to reclaim market share--could foil the firm's trajectory. This is of particular concern given Church maintains significant exposure to the mature U.S. market (around 85% of total sales) and peers are larger, more-diversified industry operators. For one, Church controls about 15% of the domestic laundry detergent aisle, which pales relative to P&G's 60% share. Further, we suspect exposure to dominant retailers such as Walmart (23% of sales) may strain Church's bargaining position, as it lacks the scale and financial muscle to defend itself from impending blows--the basis for our no-moat rating.