Most of us know Energizer Holdings (ENR) from its self-titled, world's longest lasting battery line. Or perhaps you associate the brand with the drumming Energizer bunny. You know the one that keeps going and going and going and... you get the point. However, what might not be readily apparent is the fact that Energizer Holdings is much more than a one-trick bunny.
In 2002 100% of Energizer Holdings' business came from selling batteries; granted these widely recognized Energizers translated to nearly $2 billion in revenue and just over $300 million in profit. Yet today Energizer receives just 46% of its sales from batteries. Instead, Energizer Holdings has been actively acquiring personal care businesses and can now boast about representing 5 different product categories. Specifically, Energizer Holdings owns the Schick, Edge, Diaper Genie, Wet Ones, Playtex, Hawaiian Tropic and Banana Boat brands - not to mention an additional value-oriented battery line as well. In the company's own words:
"The range of our brands is really quite impressive, but perhaps even more impressive are the many ways they make people's lives better: the ability to game for 14 hours straight on your flight to Sydney; to prevent a mess, even after your toddler drops her apple juice; to give a close, smooth shave that actually takes care of your skin."
Operating in 50 countries, with distribution in more than 160 countries - it seems fair to underscore the point that new product lines can be placed into an effective Energizer distribution network. Alternatively, this could allow the Energizer Company to pursue strategic partnerships - for instance the recent marketing alliance with Unilever's (UL) Axe brand.
Those that happen to be sticklers on the sustainability front will likely be revitalized by the company's overall view:
"Essentially, our approach to sustainability all boils down to one simple thought: "Do the right thing." Not just because we're decent, good-hearted folks - which we are - but because we're staunch believers in the idea that doing the right thing affords us tremendous opportunity to make a positive impact on the well-being of our communities, our environment, and our shareholders."
So far it appears that Energizer has been doing a reasonable job: last year waste was reduced by 30%, water usage was down 12%, greenhouse gases fell 5% and energy usage declined by 3%. Within household products, Energizer has been able to eliminate 41 tons of plastic from its packaging. In addition, Energizer was one of the first members of the Rechargeable Battery Recycling Corporation - a voluntary, industry-funded organization.
Finally, in the most recent earnings call transcript Energizer CEO Ward Klein highlighted a reasonable growth thesis moving forward:
"I'd like to conclude my prepared comments with 2 positive points: First, the Board of Directors approved an increase in the Energizer quarterly dividend to $0.50 per share, which represents a 25% increase. This increase is due in part to the favorable impact of the progress made on both our restructuring initiatives and our working capital objectives. We felt this increase in the dividend was appropriate given our cash flow generating capabilities... And second, we just announced that we have signed an agreement to acquire Johnson & Johnson's feminine hygiene brands in the United States, Canada and Caribbean, including the STAYFREE and CAREFREE business."
Both points seem to be reasonably good signs for Energizer shareholders. On the dividend front, Energizer is beginning to demonstrate their commitment to shareholder returns in addition to an already robust share repurchase program. On the acquisition side, it appears as though Energizer is continuously looking for ways to expand their diversifying business.
And if none of the above gets you energized, perhaps a dose of "battery history" or "flashlight history" might provide some invigoration. But of course that's not to say that the company is without risks - it's always good to look for additional (and especially contradictory) information. However, it might be useful to review Energizer's history since the turn of the millennium. Energizer's message has been simple: "Keep Challenging, Keep Growing"
14 Years of Growth
Energizer Holdings has grown earnings (orange line) at a compound rate of 10.8% since 2000, resulting in a $5.7+ billion dollar market cap. In addition, Energizer's earnings have risen from $2.07 per share in 2000, to today's forecasted earnings per share of approximately $6.90 for 2013. Further, Energizer Holdings initiated a dividend (pink line) in September of 2012 and has been able to increase this payout recently.
For a look at how the market has historically valued Energizer, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.
Here we see that Energizer's market price previously began to deviate from its justified earnings growth; starting to become overvalued in 2007 and becoming undervalued during the most recent recession. Today, Energizer appears undervalued to fairly valued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, Energizer Holdings' shareholders have enjoyed a compound annual return of 10.9% which correlates closely with the 10.8% growth rate in earnings per share. A hypothetical $10,000 investment in Energizer on 03/31/2000 would have grown to a total value of $40,548.01, without reinvesting dividends. Said differently, Energize shareholders have enjoyed total returns that were roughly 3.2 times the value that would have been achieved by investing in the S&P 500 over the same time period.
But of course - as the saying goes - past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs a variety of potential catalysts and opportunities for growth were described. It follows that the probabilities of these outcomes should be the guide for one's investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
Fourteen leading analysts reporting to Standard & Poor's Capital IQ come to a consensus 5-year annual estimated return growth rate for Energizer of 8.1%. In addition, Energizer is currently trading at a P/E of 13.3, which is inside the "value corridor" (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Energizer Holdings' valuation would be $152.24 at the end of 2018, which would be an 11.8% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
Now, it's paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs' subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
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 to an equal investment in a 10-year treasury bond, illustrates that Energizer's expected earnings would be 4.1 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
Finally, it's important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that - in the long-run - the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: "in what should I invest?" and "at what time?" In viewing the past history and future prospects of Energizer Holdings we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: Long UL.
