Combine value with a sense of confidence and you will become a successful investor. Or to quote George Zimmer, founder and CEO of the Men's Wearhouse, "I guarantee it."
A good place to begin your selection process might be with a longtime favorite of mine, Church & Dwight, best known for its Arm & Hammer baking soda. When I last wrote about the company a year ago, my earnings projection for 2012 was $2.40 per share with a projected 12-month share price of $57, thereby producing a 12 percent capital gain, plus an indicated dividend yield of 1.90 percent.
The shares recently closed at $63.94, so the company well exceeded my share price estimate. Earnings for 2012 came in at $2.48 per share, again exceeding my estimate. Now the question is, how will the company do going forward?
Church & Dwight is immensely profitable, producing an 11 percent return on sales in fiscal 2012. In addition, the company repurchased $242 million worth of its common stock. However, it has also taken on an additional $650 million worth of debt, thereby bringing the total owed to $903 million, which includes both long- and short-term liabilities.
While the company has been growing earnings at a very respectable rate over the past several years, for a company with $4 billion in total assets, having to service nearly a billion dollars of debt could prove challenging, especially if the macroeconomic environment deteriorates.
Church & Dwight is forecasting organic sales growth of 3 to 4 percent in 2013, with a 25 to 50 basis point gross margin increase. The company also anticipates that 2013 will be a much stronger year for reported sales growth, due in part to Avid.
Closed early last October, the acquisition of Avid brought with it Vitafusion, the No. 1 brand in adult gummy-form vitamins, and Lit'l Critters, the top brand in children's gummy-form vitamins.
However, the margin improvement in the company's core base of business will be offset by the lower margin produced by Avid. In a strong move, the company plans to increase its marketing outlays in 2013, focused behind the launch of innovative new premium products based on the company's power brands.
Looking ahead, the company's fiscal 2013 guidance has earnings per share increasing to $2.79. Meanwhile, earnings per share for the first quarter are expected to increase by 8 percent when compared with fiscal 2012.
The intrinsic value of the shares, using a discounted earnings model with a 12 percent discount rate is $63 per share. The more conservative free cash flow to the firm model offers up an intrinsic value of $81 per share.
My earnings estimate for 2013 is $2.80 per share, with a projected 12-month share price of $72, for a 12 percent capital gain. There is also an indicated 1.80 percent dividend yield.
Lauren Rudd is a financial writer and columnist; write to him at LVERudd@aol.com