Roepers Is Right On Energizer

Between April and June 2012, Atlantic Investment Management reduced its position in Energizer Holdings, Inc. (NYSE:ENR) by 9% to finish the second quarter with 2.2 million shares (see more stocks Atlantic owned at the time). Apparently Atlantic’s manger, Alexander Roepers, has changed his mind: he told attendees at the Value Investing Congress that the maker of batteries, razors, and personal care products that Energizer was his top investment idea. He expects the stock to reach $100 per share in the next six months to a year, up from about $75 currently.

Alexander Roepers

Energizer Holdings, Inc.’s third fiscal quarter ended in June, with the company reporting that revenue had declined 9% compared to the same period a year ago. Earnings, however, actually edged up; the company cut advertising costs, and several costs from the previous year related to restructuring and debt retirement were no longer in effect. Combined with the effects of share buybacks, earnings per share came in at $1.06 versus 94 cents a year earlier- an increase of 13% despite the decline in sales. Over the first nine months of the fiscal year, revenue was about flat compared to the first three quarters of last year but net income was up 36% and EPS were up 45%.

However, the stock has not been very responsive to these improvements in the company’s business. It is up 10% over the last year, underperforming the S&P 500. From a quantitative perspective, it seems about fairly priced based on its current business at 15 times trailing earnings. Obviously, if the company can continue increasing earnings per share at the recent historical rate that is an excellent value for the growth. The sell-side expects an increase of only 6% in the next fiscal year, implying a forward P/E of 12. Energizer Holdings, Inc. is also now paying a dividend yield of 2.1%, and overall we would say that it has to disappoint Street expectations- which look quite achievable- in order to prove overvalued or even at its intrinsic value.

We’ve already mentioned Atlantic’s position in Energizer at the end of June, which made it the largest hedge fund holder of the stock according to our database of 13F filings. Barry Rosenstein’s JANA Partners and Charles de Vaulx’s International Value Advisers were two other funds which owned shares: they reported positions of 1.6 million and 730,000 shares, respectively. Find more stock picks from JANA Partners and from International Value Advisers.

Energizer’s peer group includes Spectrum Brands Holdings, Inc. (NYSE:SPB), whose product offerings include batteries alongside brands such as Black & Decker and George Foreman; The Procter & Gamble Company (NYSE:PG), a $190 billion market cap personal products company and owner of Duracell; Panasonic Corporation (NYSE:PC); and Avon Products, Inc. (NYSE:AVP), which is more concentrated on the personal care products side. With the exception of Panasonic- which is unprofitable on a trailing basis- all of these stocks trade at higher trailing earnings multiples than Energizer does. Panasonic is expected to recover, with analysts giving it a forward P/E of only 8, and even though we are worried about its future prospects it could be worth investigating to see what its return to profitability would look like. Avon took a severe hit to revenue and earnings last quarter versus the second quarter of 2011, and even with Wall Street analysts expecting it to bounce back its forward P/E is still 16. We don’t think it is as good a buy as Energizer. We would note that Procter & Gamble and Spectrum Brands turned in impressive earnings performances in their most recent quarter compared to a year earlier, and they are not much more expensive than Energizer on an expected earnings basis: they trade at 16 and 13 times forward estimates, respectively. With Procter & Gamble offering a 3.2% dividend yield and boasting a much larger market capitalization, it in particular may be a better buy.

What we continue to find attractive, however, is that Energizer’s relatively cheap forward P/E is based on quite modest expectations of EPS growth next year. Some of the factors that drove earnings growth last quarter, such as an end to restructuring charges, won’t be sustainable next year. Yet if the company can hold the line on revenue, or even see a very small decline, it could easily beat the Street through buybacks.

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