Energizer Bonds Too Risky

| About: Energizer Holdings, (ENR)


Energizer has been losing sales and profits for several years.

There is $500 million in cash, but it will be used for share buybacks.

The bonds yield 4.7% and mature 5/24/22.

Energizer (NYSE:ENR) has a series of bonds that yield 4.7%. Sometimes, the bond market gets something right, and it seems the markets have pegged ENR's debt correctly. Thought that's a nice yield, cash is soon to be reduced, and the company has been losing sales for years. The bonds are priced at $100.25 and mature 5/24/22. The coupon is 4.7 and the CUSIP 29266RAC2.

Sales have slowly eroded since 2011. Back then, sales were $2.196 billion and receded to $1.631.6 in FY 2015. As Energizer is a spin-off from Edgewell (NYSE:EPC), these numbers were backed out of total financials from its previous parent company. Earnings fell from $187 million in 2012 to a loss of $4 million in FY 2015.

The latest 10-K shows $502.1 million in cash, $155.5 million in accounts receivable, and $275.9 million in inventories. This is in addition to the $167 million in accounts payable and $995 million in debt. This debt is new and is the reason why cash is so high. If I thought cash would remain the same, I'd be a buyer on these bonds. My fear is that I have no idea what cash is going to fall to.

According to the latest quarterly conference call:

...to the balance sheet, a combination of our strong cash flows and a favorable final spin allocation contributed to the new Energizer ending the year with approximately $500 million in cash. Approximately 95% of our cash is held offshore. We are holding steady at roughly $1 billion in debt, which equates to a 2.9 times debt-to-EBITDA ratio. We believe we are well positioned to execute against our three priorities for uses of cash. We're investing in the business, providing a meaningful and competitive dividend and opportunistically repurchasing shares and pursuing a selective and disciplined M&A strategy.

This is not what a bondholder wants to hear. Bondholders do not like share buybacks. That $500 million will soon disappear. Then, how much cash will Energizer hold? $200 million? $100 million? Makes a bondholder nervous. S&P has rated the bonds BB+.

2016 looks to be a rough year too. Net sales are expected to be down $50 million to $60 million. Venezuela alone accounts for $8.5 million. Restructuring costs are estimated to be between $10 million and $15 million.

There are some highlights. Free cash flow was $121.4 million in 2015, $191.5 million in 2014, and $311.8 million in 2013. It's a highlight in that there is ample free cash flow. Not a highlight in that it keeps decreasing.

The best price that I could find on this issue was $100.25 at Interactive Brokers. I also found some at $100.54 at Charles Schwab. I didn't see anything out of the ordinary in the Prospectus. There is one thing that gave me pause: Back before the spin-off, the parent carried $2.3987 billion in debt. In addition, the coupons on each series were quite high in a low interest rate environment. It tells me that management likes debt.

If management were to state that it would keep $300 or $400 million in cash parked in the bank, I'd buy these bonds. Unfortunately, there is too much uncertainty. I'm a bond guy, not a battery guy. My guess is that tech people are using rechargeable batteries and other devices that do not use traditional batteries. Energizer will probably make it, but I'd need a heck of a lot more than 4.7% to invest in these bonds.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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