EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Church & Dwight Inks Another Tie-up, But Shares Have Reached Lofty Heights

On March 28, Church & Dwight announced the acquisition of Flawless Finishing Touch, a leading player in women’s electric hair removal products (a product that initially came to market just less than two years ago). Beyond the initial $475 million purchase price, the deal (which is expected to close in the second quarter) is structured to include an additional earnout of $425 million based on around 15% compound annual sales growth each of the next three years. Management expects Flawless to be neutral to fiscal 2019 earnings (which management has guided to range between $2.43 and $2.47 versus our $2.46 mark). Overall, we view the purchase price--around 3 times sales or 11 times EBITDA--as a bit robust (similar to its tie-up with Water-Pik, a leading player in water-jet technology for oral water flossers and replacement showerheads, in August 2017), especially given Flawless has failed to evidence much in the way of staying power.

Further, we don’t posit this addition stands to benefit to Church & Dwight’s competitive positioning. For one, we fail to see how the addition of this business will bolster its pricing in the face of an intensely competitive environment and a recharged peer set. Rather, we still portend Church & Dwight lacks pricing power and negotiating leverage with retailers, leading to our no-moat rating.

At just around 4% of sales, we doubt this deal stands to move the needle on the firm’s financial performance, and as such, plan to hold the line on our $46.50 fair value estimate. Shares trade at 29 times fiscal 2019 earnings per share; we think this valuation fails to take into account the headwinds facing the firm, particularly fierce competitive actions that could be compounded because Church & Dwight lacks the scale and financial muscle to defend itself from impending blows. In that vein, we suggest investors avoid putting new money to work in this name.

We believe that Church & Dwight will continue to act as a consolidator in the space. And despite the prudence it has shown in the past, the firm’s record isn’t flawless. Management disclosed in 2015 that its vitamin business (which it acquired with the 2012 deal for Avid Health, a leading player in the gummy vitamin and supplement category, and which we estimate accounts for around 10% of consolidated sales) had struggled at the hand of capacity constraints and executional stumbles. While the firm claims to have resolved these issues, competitive pressures in the category loom and could stall the firm’s progress in regaining its footing on a sustainable basis. Further, if management continues to opts for deals at lofty valuations (similar to its tie-ups with Water-Pik and now Flawless), we may revisit our Standard stewardship rating.