Now’s the time to snap up shares of Church & Dwight as the consumer goods maker is set to gain after a dismal 2022, according to Morgan Stanley. The firm on Monday upgraded the stock to overweight from equal weight and boosted its price target to $91 from $82. The new target implies a more than 11% upside for the stock. Shares gained slightly in premarket trading. Shares of Church and Dwight dropped 21% in 2022, notching a record 2% underperformance versus competitors including Procter & Gamble, Colgate-Palmolive, Coca-Cola and PepsiCo, analyst Dara Mohsenian wrote. However, The slump offers a “compelling entry point here ahead of an expected above-consensus topline and gross margin recovery,” Mohsenian said. Margin expansion ahead The underperformance of the stock in 2022 was “reasonable” on weaker-than-expected topline and earnings per share results, driven by supply chain challenges, sharp declines in discretionary categories due to retailer inventory reductions and post-Covid normalization in vitamins, according to Morgan Stanley. But, the firm expects a “sharp fundamental turn in 2023 to above-consensus organic sales and GM results,” Mohsenian wrote. “We see consensus EPS as now reasonable for 2023 even with assumed SG & A reinvestment, with likely potential room for upside later in H2.” Topline growth should reaccelerate in 2023, driven by continued momentum in the core business and moderating headwinds in problem areas such as Waterpik, Flawless and vitamins. Morgan Stanley now expects robust second-half organic sales growth of 6.4%, solidly outperforming 2022 and moving ahead of its peers. “CHD should also benefit in 2023 from higher marketing, more normalized promotion, and a supply chain recovery,” said Mohsenian. “In addition, we see GM upside to consensus as likely to emerge in Q2, which is more industry driven, but is more impactful for CHD with its skew to US-based resin and lack of European cost exposure vs peers.” Morgan Stanley is lowering its earnings per share estimates to be more in-line with consensus, but wouldn’t be surprised to see upside in the second half of the year. “While we acknowledge CHD’s portfolio is less attractive on a relative basis after the purchase of more discretionary businesses (Waterpik/Flawless), they only comprise 10% of sales, and CHD’s safety status as a trade-down beneficiary in a weaker macro environment ,along with H2reacceleration in fundamentals, points to clear relative multiple expansion in 2023,” said Mohsenian. — CNBC’s Michael Bloom contributed reporting.
