NEW YORK, Sept. 5, 2019 /PRNewswire/ -- Report entitled
"Arm Yourself To Get Hammered" outlines how Church & Dwight
faces 35-50% downside risk to approximately $40 to $52 per
share. The report explores how a material change in management
culture and strategy has resulted in poorly-executed levered
acquisitions, numerous aggressive accounting practices, and
substandard corporate governance practices.
- A Culture Lost – Acquiring Brands As Financial Tools: Church
and Dwight developed a reputation over time as a strong operator
and smart acquirer of leading consumer brands in the United
States. This strategy was successfully overseen by former CEO
Jim Craigie, an old-school marketer
who spent his early career learning consumer products at
Kraft. In 2016, Craigie retired from C&D, the first in a
number of executive exits that would soon follow. The current
team is led by CEO Matt Farrell CEO, former C&D CFO and,
previously, EVP and CFO of accounting-plagued Alpharma Inc.
One former long-time C&D executive with whom we spoke referred
to Farrell and Rick Dierker, CFO, as
"financial magicians," and stated that their leadership ushered in
"a deemphasis on manufacturing, R&D and supply chain investment
in favor of greater financially-engineered acquisitions."
Another former executive stated, "we lost the culture, lost the
focus on brand and innovation and speed to market as far as I'm
concerned" and "it's hard to convince the retail trade that the
math [financially motivated acquisitions] makes good business sense
because the customers sell brands, sell product solutions, they
sell innovation, they're consumer-centric".
- Long-Term Growth Increasingly Dependent On A Poorly
Executed-Acquisition Strategy: With the exception of anchor brand
Arm & Hammer, all of C&D's "Power Brands" have been
acquired since 2001. Per C&D management's own suggestions
and confirmed by our research, we believe that 6 of the 10
acquisitions should be categorized as failures. With the
shift in M&A strategy under the current management team,
C&D's acquisitions have grown increasingly questionable.
C&D paid $1 billion for Waterpik,
an asset that has been passed around by private equity owners more
than once, and which is already showing declining sales and
margins. FLAWLESS, Farrell's other large acquisition, is
believed by former employees to be a poorly-regarded and unproven
hair product removal brand: one former executive told us, "Dump it!
Oh God! Horrible, Horrible." As the businesses targeted and prices
paid by management have grown increasingly perplexing, so has the
structuring and accounting of the deals themselves. Our
forensic analysis suggests that both recent deals are showing signs
of struggles, and identifies several accounting anomalies
associated with both. We believe that management's track
record casts doubt on C&D's new approach to M&A, the
linchpin of the company's current growth strategy.
- Signs Of Financial Strain, Aggressive Accounting And Management
Self-Enrichment: While management would like investors to
believe that the Evergreen Model's growth "algorithm" is on
autopilot, slowing dividend growth and worsening cash conversion
suggest otherwise. We believe that management's response to
these challenges has been to attempt to financially engineer higher
growth through a combination of greater receivable factoring,
oddly-structured M&A, an undisclosed acquisition, and one-time
gains to EPS. Conveniently, none of management's annual cash
incentive targets are modified to correct for the flattering
presentation of financials. Furthermore, we are unable to
reconcile the company's reported financials with the "adjusted"
metrics through which management hits its bonus targets.
- Slower Growth And Poor Earnings Quality To Drive Multiple
Contraction: CHD stock has prospered from investors' flight
to defensive equities: its valuation multiple is presently at an
all-time high, and the stock trades at an 8% premium to the average
analyst price target. C&D's stock is valued at 5x, 22x,
and 32x 2019E Sales, EBITDA, and EPS, respectively – a significant
premium to its peer group for a few extra percentage points of
potential growth, which we believe the acquisition strategy will
fail to deliver. In our opinion, the risk / reward is not
favorable in light of future growth challenges and accounting
shenanigans that could necessitate a financial restatement.
Valuing C&D at peer multiples on our financial metrics –
adjusted to reflect its mediocre brand portfolio, weak management,
substandard governance practices, and failing acquisition strategy
– we can justify a price range of $40
– $52 (35% – 50% downside).
Spruce Point Capital has a short position in Church & Dwight
Co., Inc. (CHD) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities.
Contact
Sean
Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management