In Focus

The Plight of Church & Dwight

Think Baking Soda. What's the first thing that comes to mind? If you didn't think "Arm & Hammer" then you're one of the few. In conducting my own survey (by 'my own survey' I mean that it was extremely random and non-clinical-i.e. I asked a bunch of people at a hockey game over a few beers) I found that the only exception to the 'Arm & Hammer' response was "What I'll need to soothe my stomach after tonight's indulgences." Either way, when a further inquiry of "What kind of baking soda would you use?" was made, Arm & Hammer was still the baking soda of choice.

Arm & Hammer goes way back. Everyone recognizes the ubiquitous yellow box. It's about as American as apple pie or baseball. Most consumers know it as a cooking ingredient, toothpaste or laundry detergent. Many people also use it as an acid neutralizer for an upset stomach, a stain remover for countertops or moldy grout, or even to remove product buildup from hair. What people don't realize is that it's also used agriculturally to dry hay, and that it's the primary life-giving cleansing agent in dialysis. Its largest single use is as a cattle feed ingredient which allows cows to produce much more milk. And for all you environmentally friendly consumers out there, it is also the key ingredient in a new family of industrial cleaning products which are replacing ozone-eating and possibly carcinogenic chemicals.

Who knew?

In light of the obvious name recognition associated with Arm & Hammer products, I decided to investigate the company and see how they rated. Church & Dwight (NYSE: CHD), manufacturer of Arm & Hammer products, saw their fiscal year net sales up 7% to 730 Million and their net income up 50% to 45.4 Million. Sounds great, but I'm trying to figure out why this highly identifiable company ran into some tough times. Thumbing through C & D's prospectus gives us some insight. First of all, the products most of us are familiar with are not the biggest producers for C & D. Their Specialty Products Division (SPD), the one responsible for all those hidden wonders I mentioned earlier, has produced an impressive 40% of operating profits despite representing only 20% of total company sales. Also important to note is that their SPD ranks as the largest in the world in nearly all the businesses in which it operates whereas the Consumer Division (i.e., toothpaste and all those items with which you and I are more familiar) appears much smaller compared to their rivals at Proctor & Gamble and others.

With the growth the company experienced in the last year it is difficult to understand their falling numbers. It's possible they, like so many others, took a hit in the volatile market. Predictions for the future look great, however, and Salomon Smith & Barney have called this recent stock price pullback a "compelling buying opportunity." As we all know the stock market is anything but predictable and in the past few months has been quite the rollercoaster... so do we judge this company by its declining numbers? (Which, by the way, are on the upswing again.) Or do we think like Chicks and incorporate the big picture??

Here's what C & D has to offer from a Chicks Eye View. Again, the "ubiquitous Yellow Box." Everyone knows it, your fourth grader could draw it with three crayons - red, black, and yellow to be exact. Its competitors are few and far between and to borrow a phrase from a popular commercial: Average cost of 1 box of Arm & Hammer Baking soda = .89; Value of ice cubes without freezer burn = priceless!

C & D's numbers aren't completely Chicky, but they're close. Gross Margins are 45, Net 6.2, cash v. long-term-debt -34 and flow ratio comes in at around 1.01. The backbone for this company appears to be Dwight C. Minton. He is one of the descendants (5th generation) of the founding family, so there is a real personal interest in its success. He has degrees from Yale & Stanford and is truly an amazing man, interested in being environmentally conscious when it was taboo for big corporations to do so.

On October 27, Church & Dwight reported "sales increased 7.5 percent to $199.8 million from $185.9 million for the comparable quarter in 1999. Strong sales of toothpaste, detergent, cat litter and bathroom products offset lower deodorant and gum sales." Currently this stock is trading at around $22, with the 52 Week high being $29 and the 52 Week low being $14.68. Like the rest of the stock market, Church & Dwight has had to fight the good fight lately. But the question remains whether or not Arm & Hammer still has muscle?

I'd bet on them against The Rock any day!