- The alkaline category is healthy, showing much more positive trend than we saw pre-pandemic, and is settling down to modest volume growth.
- Focus on 3-year CAGR growth to take us back to comparisons with pre-pandemic levels at +1.2% annually.
- Pricing has already been announced which should allow maintenance of margins. Significant commodity increases, especially in Zinc, and the increasing general inflation environment will necessitate new pricing by Energizer.
- Energizer has been the leading brand in the U.S. for alkaline since mid-2020. They can have an even bigger margin of win if we include their lithium business, which has cell sizes competitive with alkaline and which can possibly put them in the lead several months earlier.
- The stock has been oversold and should be a good opportunity up to a price of about $39.
US Market Data Through 3/26/2022
Category Health: Alkaline volume and pricing trends
Pricing is strong going into the new year, finally reflecting the sell-through of the Energizer (NYSE:ENR) and Duracell increases. With the strongest general inflation in 40 years and the impact of commodities from sensitive geographies like China, we expect more pricing later this year from both these companies in what seems like a rational duopoly.
Due to the extraordinary alkaline growth at the beginning of the pandemic, we are seeing the expected declines in year-to-year volume gains – and as we pass the 2-year anniversary of the start of the pandemic related growth, negatives in the 2-year CAGRs. For March 2022, the 3-year period CAGR at +1.2% suggests growth prospects at lower levels than we might have expected, but still with some real growth vs. a modestly declining category prior to the start of the pandemic. Energizer has become more bullish on category prospects in the last few months, albeit with no specific guidance.
Brand Share Trends
The historical share data now reflects a consolidated share for Energizer and Rayovac as "Energizer" on our charts. In January 2018, the deal was announced, but it was a year later, in January 2019, before the deal could be closed due to needed regulatory approvals in Europe. During that limbo period and into the next year, the combined shares for Energizer and Rayovac declined; however, since early 2020, Energizer has been gaining market share to a new high of 47. Duracell has been steadily losing market share since early 2020 to both Energizer and Private Label. Fourth quarter Duracell gains came from Private Label, but Duracell has now continued its declining trend to 38.
The Nielsen aggregate promotional activity numbers do not provide the detail I like, but they do suggest Energizer activity increasing, perhaps moving back to pre-pandemic levels while Duracell activity continues to show declines.
If we also added in the Energizer lithium, which is mostly major cells (like AA and AAA) competitive with alkaline, the Energizer share would be 49.2 vs. 38.6 for Duracell.
Energizer announced price increases in June 2021 to be phased in during the 2022 fiscal year (ending January 2022). Duracell followed shortly thereafter. Energizer had not provided guidance on the specific % but did indicate they would keep pace with commodity price gains. We saw those price increases finally showing up at retail in November, and for Q1-22 there were at about +8%. Energizer has indicated additional pricing rounds beginning in March for batteries and we expect Duracell to follow quickly.
Commodity prices have continued to climb for most of 2021, with some leveling through February 2022, but with March back up again. The big problem is zinc up 42% in March vs. year ago and up 109% in March vs. 2 years ago and are now at their highest levels in 14 years. With the largest portion of world zinc coming from China, zinc cost pressure will continue to be a problem. EMD (Electrolytic Manganese Dioxide) pricing is still in reasonable ranges with modest climbs since mid-2020; with significant EMD sourcing from China, future price pressure for EMD is also a concern. Steel had edged back down but is back up in March with concerns about Chinese steel due to COVID lockdowns and Russian steel due to war and sanctions. Graphite has continued to be stable.
In addition to the commodity movements noted above, Energizer also indicated that transportation and labor costs continue to rise.
At the current price of $31.15, Energizer is trading below the lowest analyst estimate for 2022. And, the consensus estimates already reflect some recent drops in analyst estimates. Concerns have been about too much debt, difficult COVID sales comparisons, and cost pressures.
The recently secured debt in March of $300M at 6.5% should make debt manageable and will eventually look very prudent as inflation necessitates increased interest from the Fed. The top line sales comparisons will continue to look strange due to strong COVID related growth in the prior 2 years, but the focus should be on comparisons with the declining market of 3 years ago. While this is not a growth category, those 3-year numbers from the March Nielsen period make a +1.2% category growth going forward look very attainable. Combine that with the continued positive market share trends for Energizer and growth should modestly exceed Energizers estimates. If Energizer only maintains their March quarter shares, the full year comparison vs. prior year would add about 4.7% to the 1.2% category growth. That gives them room for some variance while still exceeding any growth targets. The cost pressures are real, especially for zinc, but are not as pervasive as many analysts think – combine that with an ability to take pricing and, as Energizer indicated in recent comments, less price elasticity than we have seen historically, they should be able to maintain profitability. And Energizer has already announced pricing action for the year effective in March. We will certainly see some response from Duracell, but with this industry looking like a rational duopoly, I do not expect the vicious price promotion of a few years ago that destroyed profitability.
Something around the consensus looks like a good stock price target. So while this is not a must-have stock, it does have solid prospects suggesting a modest buy followed by watchful waiting.
This article was written by
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