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Spruce Point's Ben Axler Talks Church & Dwight Short: 'Very Simple Case'

Jayson Derrick

Spruce Point Founder and CIO Ben Axler said in a CNBC interview Monday morning there is a "very simple case" for being short Church & Dwight Co., Inc. (NYSE: CHD).

What Happened

Spruce Point said in a short report Thursday that the parent company of Arm & Hammer engages in "extreme financial engineering, aggressive accounting and managerial self-enrichment practices."

On Monday, Axler was a guest on CNBC's "Squawk Box," where he defended his thesis and argued the "iconic company" leveraged its stable Arm & Hammer brand to diversify into underperforming new brands.

Most recently, Church & Dwight bought Waterpik for five times what its prior private equity owners paid, and the Flawless hair care brand, which sells "next to the lightbulbs" in discount stores, he said.

"We don't think these brands they are buying have real staying power," he said. "We think they are going to lose market share."

"Squawk Box" co-host Andrew Ross Sorkin pointed out the company's organic growth so far in 2019 is up 4.7% and 3.6% over the past decade.

The short seller responded that near-term organic growth is "overstated" and a function of price increases that will lapse next year.

Axler said he found evidence of undisclosed acquisitions in some of the international units. It is likely these undisclosed acquisitions have been "used to boost the organic growth," and he said investors shouldn't have confidence in the organic growth numbers.

"We have confidence in our long-term plan to deliver superior returns based on our 'evergreen business model,' and our strong second-quarter results demonstrate our continued momentum," Church & Dwight told CNBC in a statement in response to Spruce Point's accusations. 

"This report contains a number of false and misleading statements and is simply an attempt by a short seller to negatively impact Church & Dwight's share price for its own benefit." 

Why It's Important

Axler confirmed his firm is short the stock and said it wouldn't be unreasonable to see shares lose 50% of their value from a valuation perspective, he said.

The stock is trading at 20 times EBITDA, which is a premium to its long-term historical multiple of around 13 times.

"If you believe me that the corporate governance is bad, that the quality of the financials is bad, that they are struggling ... why would you pay a premium multiple for a company like this?" Axler said. 

What's Next

Axler said there are a "lot of signs of strain," and this is evident, as company insiders are selling their positions.

Three directors sold some of their shares in the past few weeks anear $80 per share, he said. 

"I usually follow what insiders do, and that's a strong signal to me of why I am short." 

Church & Dwight shares were down 2.74% at $73.81 at the time of publication Monday. 

Related Links:

Goldman Sachs Upgrades Church & Dwight, Says Recent Sell-Off Presents Opportunity

Spruce Point, Kerrisdale Talk Bearish Bets: 'You Have To Work Harder To Understand The Short'

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