ENR – Cheap for a Reason

Energizer fits the profile of a stock, at the very least, that we do not want to own. We expect the stock to underperform as competitive pressures continue to impact both the personal care and home product segments of the company’s business. Sluggish top-line performance, particularly in Personal Care, is weighing on expectations as cost savings are being pulled forward to maintain earnings growth.

Overview: Energizer is one of the largest manufacturers and marketers of primary batteries, portable lighting and personal care products in the wet shave, skin care, feminine care, and infant care categories. The company’s exposure to these respective product categories is detailed in the chart below.

ENR – Cheap for a Reason - enr rev by category

Fundamental Outlook: Energizer is widely known for its battery and lighting products but the company derives 54% of its revenue and 51% of its operating profit from the personal care category which has seen a deceleration in trends over recent months. The company has grown revenues and income at 8% and 26%, respectively, on a blended trailing-twelve month basis.

Personal Care: In the most recent quarter, Hydro Disposables offset sharp declines in U.S. men’s razors and shave prep sales as negative impact of promotional environment has created a more difficult competitive environment.

Household Products: Distribution losses at two U.S. retailers will impact numbers starting in 4Q, exacerbating the impact of declining category sales of roughly 2% and other company-specific restructuring-related factors.

Conclusion: Going forward, earnings targets may be met as cost savings are made but we believe the stock’s multiple is unlikely to appreciate meaningfully until investors see evidence of an acceleration in sales growth. The stock is currently trading at 13.7x forward earnings, which is close to the high-end of its range over the past four years. The bull case seems to be that earnings should grow as cost savings are implemented and, as a result, the multiple should expand. This thesis strikes us as similar to the bull case on KMB. In that instance, sluggish revenue growth has dissuaded investors despite cost savings driving earnings to meet expectations. As investors increasingly look for growth over yield, we expect ENR’s performance to underperform its peer group. We favor EL on the long side, at current levels, and would continue to be short KMB.

ENR – Cheap for a Reason - KMB ENR eps

ENR – Cheap for a Reason - enr levels

Rory Green

Senior Analyst