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Energizer Looks To Reenergize

Posted: Jul 30, 2009 09:44 AM by Ryan C. Fuhrmann

Tickers in this Article: ENR, CLX, KMB, UN, UL

Energizer Holdings (NYSE:ENR) operates two primary divisions. The household products sector consists primarily of selling batteries, which has been a challenging business for some time and has become more difficult as consumers focus on private-label and lower-prices goods to reduce costs. The personal care unit has held up better and is where the company continues to focus its energies. The question is if this will be sufficient to set the company apart from the competition.

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Quarterly Review
Total net sales fell 6% to $997.5 million as organic sales fell 1% and adverse currency fluctuations accounted for the remainder of the top-line decline. Household sales fell 13% (negative 6% organic growth) to account for 47% of sales. Management cited lower volume as the primary culprit for the decline, though it was able to sell a better mix of higher priced products.

Retail consumption of the flagship Energizer Max batteries fell between 3 - 4% on "cautious retailer inventory investments and unfavorable device trends, primarily in developed markets." However, the company was able to hold or grow share in its overall battery franchise as the overall market struggled and other brand sales held tight.

Spend It On Yourself
Reported personal care sales came in flat but would have grown 5% on an organic basis on mid-single digit increases in key categories including shaving, skin and feminine care. Infant care sales improved 10%. Energizer also completed the $275 million acquisition of the Edge and Skintimate business from privately-held S.C. Johnson & Son's. It issued just under 11 million shares at $49 per share to fund the purchase and shore up its cash holdings.

Household product profits fell 16% and the decrease was attributed to lower volumes and currency fluctuations. Energizer expects these tough conditions to persist into the fourth quarter. Profits grew 6% in personal care as higher sales and strength in Playtex products were sufficient to offset negative currency impacts. The end result was $1.13 in diluted earnings per share, or flat from last year's quarter as higher net income during the quarter was offset by the higher share count.

Third-quarter earnings came in ahead of analyst projections. The consensus analyst expectation is currently calling for $5.29 in full-year earnings, which would represent a 7% decline from the $5.71 reported last year.

Competitive Landscape
Energizer's results are similar to what rivals have been experiencing. Kimberly Clark (NYSE:KMB) posted a slight fall in sales during its second quarter as higher prices were not enough to offset a stronger dollar and lower volumes. Clorox (NYSE:CLX), which, along with Energizer is one of the smaller consumer goods operators in terms of market cap, reports fourth-quarter earnings on August 3. Unilever (NYSE:UN) (NYSE:UL) also cited struggling sales in developed markets, with negative European sales and profit growth.

The Bottom Line
Energizer is currently trading at a forward P/E of under 12x, which is at the low end of its valuation range over the past five years. Free cash flow also tends to meet or exceed reported net income each year, illustrating that the company generates excess capital to fund acquisitions and repurchase shares.

Unfortunately, unlike other consumer staples peers, Energizer doesn't pay a dividend (the above peers boast yields between 3% and 4.5%), but as long as it can invest in businesses that exceed their cost of capital, shareholders are better off letting management pursue prudent acquisitions. Plus, share repurchases are arguably as beneficial to investors. (See our article, Using Consumer Spending As A Market Indicator to learn how consumer spending can help you identify the trend.)

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By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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