For my first official post, I’d like to get things rolling with a bit of analysis. The Clorox Company and Church & Dwight Company recently released their respective earnings reports. In this post, I’m going to discuss which of the two companies I believe is the most attractive investment in the long run.
Both operate in the consumer non-discretionary sector. I am attracted to these companies because over the long term, many of us will still be washing our clothes, mopping our floors and brushing our teeth regardless of the state of the economy. Both entities also own a roster of well-respected brands. While Clorox may be the most recognizable of the two, both companies are suitable for comparison.
As I mentioned in my investment philosophy, I prefer to focus on years, not quarters. My argument for this approach is that there may be a lot of “noise” in quarterly numbers which may hide the true long term performance and outlook of a company and thus its shares as well.
Let’s start our comparison with The Clorox Company (click image below for full size version):
The analysis shows how Clorox has performed over the last five years in certain key areas. A glance at the data reveals that the Company has turned in a fair set of numbers in areas such as: top line growth, margin maintenance, EPS growth, good debt coverage, et cetera.
Let us now do a side-by-side comparison with Church & Dwight (click image below for full size version):
The comparison that I’ve done shows that Church & Dwight surpasses Clorox in all but seven of the key categories I use to determine long term attractiveness. Normally I’d be concerned with the trajectory of C & D’s debt, but I take comfort in knowing that growth in its debt service capacity has more than outstripped said debt growth.
Other qualitative factors that I find make C & D an attractive investment opportunity include:
- High quality EPS with little help from buy-backs.
- Good cost control (stable gross margins, rising net margins).
- Room to grow dividends while investing in the future of the business (C & D’s payout @ 41% vs. Clorox 69%).
- Collection of strong brand names (Arm & Hammer, Trojan, First Response).
- Significant potential for international expansion (non-US sales totaled 19% in 2014).
- Successful M&A track record.
From a pure valuation perspective, the analysis suggests that C & D is more expensive than Clorox with a Forward P/E of 25 versus 23 times for Clorox and a P/S ratio of 3.5 compared to 2.8 times (other relative valuation metrics are likely to reveal the same). It may also suggest that C & D is expensive and should be avoided.
However, I’m giving more weight to the five year analysis and the business itself. In conclusion, I believe C & D will make an excellent hold for the long term investor. In fact, it wouldn’t surprise me if in the not so distant future that Church & Dwight may be an acquisition target of a much larger international consumer products giant.