By Matt Doiron
Energizer Holdings (ENR) is best known for its brand of household alkaline batteries but its Personal Care segment (which includes, for example, Schick razors and Banana Boat sunscreen) has recently become the company's largest source of revenue and earnings as these businesses have grown faster than battery-related ones. As of now, Energizer is priced at a reasonable level for a portfolio of strong consumer staples brands, with a trailing P/E of 16 and a forward P/E of 12, and we think the company's value prospects deserve further investigation.
Energizer is priced at a reasonable level for a portfolio of strong consumer staples brands, with a trailing P/E of 16 and a forward P/E of 12. In its most recent 10-Q, Energizer announced an increase in revenue and a doubling in earnings per share compared to the same quarter in the previous year. In the first half of its fiscal year (which began in October), the company has seen a modest 5% rise in revenue and a 58% increase in earnings per share compared to a year ago. Cash flow from operations has doubled, also a strong sign. The Household Products segment saw flat earnings and revenue, with increases in the alkaline battery business offsetting declines in other battery products. Bottom-line growth came nearly entirely from Personal Care and the end of administrative expenses related to a restricting of Household Products.
At last filing, three hedge funds owned at least 1 million shares of Energizer. Value fund Atlantic Investment Management, managed by Alexander Roepers, owned 2.5 million shares. According to its 13F, this made Energizer Atlantic's third largest position (see other stocks in Atlantic's portfolio). Barry Rosenstein's JANA Partners increased its holdings 78% and reported 1.8 million shares in its portfolio. Read our coverage of JANA Partners' investment letter. Finally, Adage Capital Management, which is run by two alumni of Harvard Management Company (the Harvard endowment also owns a minority stake in the hedge fund) still owned 1.1 million shares after having sold a significant chunk of its shares in the fourth quarter of 2011. Insider activity at Energizer has been very limited recently.
Energizer's two closest peers in the battery business are Panasonic (PC) and Spectrum Brands (SPB). Panasonic is unprofitable on a trailing basis, and in its most recent quarter reported an 8% revenue decline compared to the same quarter of 2011. Spectrum is also unprofitable on a trailing basis, and though analysts expect it to turn around its forward P/E multiple is even with Energizer's. Rival Duracell is owned by Procter and Gamble (PG), which also owns the Gillette brand of razors that competes with Schick. Procter and Gamble has a trailing P/E ratio of 20, and also pays a dividend yield of 3.5%. Procter and Gamble also reported a 16% decrease in earnings in its most recent quarter compared to the previous year, and its growth over the next year is expected to be fairly low. Obviously, Procter and Gamble is a much larger business with a market capitalization about 35 times Energizer's $5.2 billion, and it is possible that its portfolio of offerings includes more struggling products than Energizer's does. So far this year Procter and Gamble and Energizer are about flat while Panasonic has slumped 20% and Spectrum has rallied 30%.
We look at Energizer and see a value stock with growth opportunities in Personal Care and a stable, well-known battery business. Panasonic and Spectrum Brands have struggled recently, but it hasn't and its brands have seemingly trumped Procter and Gamble's over the last few months. We think that Energizer, which currently has similar or lower valuation multiples compared to these companies, should rise in price relative to them over the next several months.