Energize Your Portfolio With This Stock

By Gayatri Sharma - September 24, 2012 | Tickers: ENR, PCRFY, PG, SPB | 0 Comments

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Energizer Holdings (NYSE: ENR) shares are seeing positive momentum after the company's recent announcement that it expects to save $175-$200 million annually following an assessment of its cost structure and operating model. The company said that initiatives in the pipeline will begin accruing in the second half of its fiscal year 2013. But is the company really worth $470 million more than it was a day before announcement or the market is over reacting to this news? Well, let’s analyze the impact of these savings on the FY14 EPS.

Let’s take the midpoint of this pre-tax savings estimate to start with (i.e. $187.5 million). Moreover, the company expects that 70-80% of the savings will improve profitability, and the remaining portion of the savings will be reinvested to drive long-term growth. So, I am taking the midpoint of this range as well (i.e. I am assuming that 75% of this savings estimate of $187.5 million will directly go to the bottomline). Assuming a 30% tax rate, this would result in $1.53 increment in FY14 EPS. This represents ~23% upside to the consensus estimates. The stock has risen ~12% since the announcement. Thus, I believe the market is not over reacting to this news and we can see further appreciation in the shares over time if we assume its PE multiple to remain the same. 

This savings program is much more extensive than the one the company embarked on two years ago. In addition to further manufacturing rationalization in the Household segment, it will also focus on plans to streamline international, reduce overhead, and generate procurement savings for the total company. It is another indication that Energizer is on its way to being a more shareholder friendly/better capital allocating company.  Moreover, the company announced an expanded set of incentive criterion. Previously, long-term and short-term incentives were tied to EPS. Going forward, long-term bonuses will be based on EBITDA, ROIC, and relative TSR. Short-term bonuses will be based on deliverance of cost savings, non-GAAP EPS, EBIT, and net working capital. I applaud the longer-term focus, as the Street’s focus on Energizer’s previous compensation structure added volatility. I think the company will continue to yield multiple expansions from a significant discount the company's P/E currently trades at vs. its peers.

Energizer competes with Panasonic Corporation (NASDAQOTH: PCRFY) and Spectrum Brands (NYSE: SPB) in the battery business, and Procter & Gamble (NYSE: PG) in the personal care business. Let’s analyze the valuation metric of these companies.

Panasonic has the lowest forward P/E but I suggest staying on the sidelines as the company is unprofitable on a trailing 12 month basis and lacks visibility going forward.  Among the other three companies, Energizer has the lowest multiple which seems a little odd especially considering the fact that Energizer has the highest expected annualized growth rate over the next five years.

Moreover, Energizer's 9.7% FCF yield is very attractive compared to the peer group average of 5.6%. With the profit trajectory stabilized for at least the medium-term, and management incentives now aligned; I expect better capital allocation, business performance, and multiple expansion to reward shareholders handsomely. Thus, I recommend buying this stock.

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