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ENR reported a big beat versus consensus this morning, $1.80 versus $1.27, but oddly didn’t take the opportunity to increase its full-year guidance (remains $6.75 to $7.00).  Odder still, the maintained guidance range includes a higher level of cost savings – to a range of $50 to $60 million from the prior range of $25 to $35 million.  We expect a positive stock reaction given the magnitude of the EPS beat, but that the reaction should be muted given the lack of flow through to full-year EPS and the likely need for negative EPS revisions in 2H.



What we liked:

  • Big beat versus consensus
  • Increased annual cost savings target (to a range of $50-$60 million from $25-$30 million)
  • Increased total project cost savings target to $225 million from $200 million
  • Very good gross (+148 bps) and operating (+398 bps) margin performance
  • A promise to increase advertising and promotion spending in 2H

What we didn’t like:

  • No flow through to full year guidance on huge EPS beat and higher annual cost savings, implying a material reduction to 2H consensus
  • Lackluster (+0.3%) currency neutral sales growth
  • Advertising and promotion expenses declined 8.2% in the quarter after declining 1.7% in Q1
  • Weird revenue guide down in the Personal Care segment (to low single digit increases from prior mid-single digit sales growth), but only reflects 1H weakness, as the company expects 2H sales growth in the 3-5% range – so a call for material improvement in sales trends in this segment
  • Company is still anticipating low single digit sales declines in Household Products, but an odd Q4 2013 call out of weakness

Bottom line, sales trends remain anemic, but cost savings provide substantial income statement flexibility.  The name isn’t particularly expensive on consensus numbers (14.1x calendar ’13) but our issue is that we have a difficult time seeing any opportunity for material EPS growth once cost savings have run their course.   The battery category remains challenging, and beyond that we don’t see the opportunity for sustained growth in the company’s other categories.

 

Call with questions,



Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst