With Energizer Holdings (ENR) declaring its first-ever quarterly dividend payment to all shareholders of record at the close of business yesterday (Aug. 22, 2012), we decided to review the company through the lens of F.A.S.T. Graphs™. The stock currently appears undervalued based on its historical operating history, especially since the company just started paying a dividend.
Management appears to have a lot of confidence in the company's future, as evidenced by a statement from CEO Ward Klein: "The payment of a quarterly dividend reflects our financial strength, consistent cash generation, and commitment to increasing shareholder value and total shareholder return." This might be a good time for the prudent investor to research Energizer Holdings to possibly add it to their portfolio.
About Energizer Holdings, taken directly from its website:
Energizer Holdings, headquartered in St. Louis, Mo., is one of the world's largest manufacturers of primary batteries, portable flashlights and lanterns. Energizer is a global leader in the dynamic business of providing power solutions with a full portfolio of products including Energizer® brand battery products Energizer® MAX® premium alkaline; Energizer®Ultimate Lithium; Energizer® Advanced Lithium; Rechargeable batteries and charging systems; portable flashlights and lanterns; power connectors, inductive chargers and, most recently, comprehensive household lighting collections.
Earnings Determine Market Price
The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph, the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Earnings and Price Correlated Fundamentals at a Glance
A quick glance at the historical earnings and price correlated F.A.S.T. Graphs™ on Energizer Holdings shows a picture of undervaluation based upon the historical earnings growth rate of 11% and a current P/E of 11.6. Analysts are forecasting the earnings growth to continue at about 10.7%, and when you look at the forecasting graph below, the stock appears undervalued based on analysts' forecast (it's outside of the value corridor of the five orange lines -- based on future growth).
Historical Earnings, Price, Dividends and Normal P/E Since 2003
Click to enlarge images.
Performance Table for Energizer Holdings
The associated performance results with the earnings and price correlated graph validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
Long-term shareholders of Energizer Holdings, assuming an initial investment of $1,000, would have received a total return of 9.8% per annum vs. 3.7% in the S&P 500.
The following graph plots the historically normal P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price/earnings ratio on this quality company is as low as it has been since 2003.
A further indication of valuation can be seen by examining a company's current price/sales ratio relative to its historical price/sales ratio. The current price/sales ratio for Energizer Holdings is 0.95, which is historically low.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
1. The rate of change (growth rate) of the company's earnings
2. The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component toward making sound and prudent commonsense investing decisions.
The consensus of 14 leading analysts (purple highlighting) reporting to Capital IQ forecast Energizer Holdings' long-term earnings growth at 10.7%. Energizer Holdings has medium long-term debt at 51% of capital (red circle). The company is currently trading at a P/E of 11.6, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Energizer Holdings' True Worth™ valuation would be $143.10 at the end of 2017 (brown circle on EYE Chart), which would be a 17.5% annual rate of return from the current price (yellow highlighting).
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in Energizer Holdings to an equal investment in 10-year Treasury bonds illustrates that Energizer Holdings' expected earnings would be 7.4 (purple circle) times that of the 10 year T-Bond Interest. (See EYE chart below.) This is the essence of the importance of proper valuation as a critical investing component.
Summary and Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.