ENR - Energizer Holdings Still Has Power To Move Higher

2024-01-07 01:00:44 ET

Summary

• Energizer Holdings is a well-known brand in the battery production space, but operates in mature markets.
• Despite a decline in revenue, the company saw a significant increase in profits in 2023.
• Management is focused on reducing debt and improving profitability, making the stock an attractive investment.

Beyond any doubt, one of the most iconic consumer brands in the world today has got to be Energizer Holdings ( ENR ). Although the firm is not that large, with a market capitalization of only $2.29 billion, it is well known as a giant in the battery production space, particularly when it comes to disposable batteries. In addition to selling batteries, the firm also produces and sells certain auto care products such as protectants, wipes, glass cleaners, leather care products, air fresheners, and more. None of this is viewed as a real growth market these days. Rather, the spaces in which the company operates are largely mature. Because of this, shares often trade at relatively low multiples. But given the amount of cash flow the business generates and management's continued efforts to reduce leverage, I think the stock is too low.

This is not my first time saying this. The last article that I published about the firm came out in October of 2022. In that article, I acknowledged that financial performance leading up to that point had been somewhat mixed. But when I looked at how cheap the stock was and the long-term trajectory for the company, I could not help but to be bullish on it. That led me to rate the enterprise a ‘buy’ to reflect my view that the stock should outperform the broader market for the foreseeable future. Unfortunately, the business has not done quite that. Having said that, share price performance has still been impressive. While the S&P 500 is up 30.3% since the publication of that article, shares of Energizer Holdings have generated a return for investors of 25.1%.

The picture is getting better

Just last month, the management team at Energizer Holdings released financial results for the final quarter of the company's 2023 fiscal year . Just as has been the case in prior years, 2023 was mixed for the enterprise. Revenue, for instance, fell from $3.05 billion in 2022 to $2.96 billion in 2023. That's a drop of nearly 3%. A lot of this pain was driven by factors outside of the company's control. For instance, given the conflict between Russia and Ukraine, the firm, following so many other businesses that had operations in Russia, ceased operating there.

That resulted in a year over year decline in sales of $12.6 million. The enterprise also was hit to the tune of $5.3 million thanks to a change in operations in Argentina. But the largest impact involved foreign currency fluctuations, which hit the enterprise to the tune of $40.9 million. Actual organic sales only dropped by $31.6 million, or about 1%. An increase in pricing to the tune of 7.5% helped the company on this front. But this was more than offset by 7.5% drop in volume in response to the price hikes and because of the economic climate. Volume declined by another 1% because of the company's decision to exit low margin businesses that it had been engaged in previously.

Even though revenue dropped, profits for the business shot up nicely. The firm went from generating a net loss of $235.5 million in 2022 to generating a profit of $140.5 million in 2023. This came about in part from an increase in the firm's gross profit margin that was largely attributed to the aforementioned price increases and by restructuring activities. A slight decline in research and development costs also helped. But the biggest issue, by far, was an impairment to goodwill and other intangible assets in the amount of $541.9 million that the company incurred in 2022. Given the nature of some of these changes, investors should not be surprised to see other profitability metrics experience volatility. Operating cash flow, for instance, shot up from only $1 million to $395.2 million. But if we adjust for changes in working capital, we would get a slight decline from $335.2 million to $332.1 million. Meanwhile, EBITDA actually increased, inching up from $567.9 million to $597.3 million.

Now is probably a good time to talk about some changes that management is working on. For starters, the significant operating cash flow that the firm generated in 2023 allowed it to not only allocate $86.3 million toward dividends, but also to reinvest in capital expenditures while simultaneously reducing debt by $220.9 million. That pushed the company’s net leverage ratio from 5.8 to 5.2. And if everything goes according to plan for 2024, the net leverage ratio for the firm should be below the 5 mark by the end of 2024. This should not be difficult. You see, management has come out with guidance as you can see in the image below. If we use the midpoint of guidance for EBITDA, the business would need to spend only $140.3 million to get the net leverage ratio down to 4.9. Based on my own estimates, adjusted operating cash flow for 2024 should be around $394.5 million. So assuming that capital expenditures and dividends remain unchanged, and if we assume that the ‘other’ category remains unchanged as well, then management should have as much as $238.2 million to put toward debt reduction.

Another area of improvement that the company has touched on involves its auto care products. Even though sales associated with these products inched up from $618.7 million in 2021 to $622.8 million in 2022, inflationary and other pressures caused the gross profit margin of the unit to plunge from 15.9% in 2021 to 7.5% in 2022. Unfortunately, sales for this unit pulled back slightly to $614.8 million in 2023. However, the downside from this was more than offset by a surge in the gross profit margin to 12.2% as management cracked down on costs. Assuming this trend continues into the 2024 fiscal year, it should go a long way toward offsetting a possible decline in global battery shipments. This is not to say that a decline in shipments will occur. But ever since peaking at 22.4 billion in 2020, they have been constantly falling. In 2023, for instance, they hit the lowest point that they had since 2019, with a reading of 20.1 million.

If nothing significantly negative does come up, then shares should be priced as shown in the chart below. I would prefer not to rely on the forward estimates since a lot can happen in a year. But even if the company were to trade at the 2023 levels, shares look very attractive. I would make the case that there aren't any truly great firms to compare Energizer Holdings to that are publicly traded. But in general, a company with a stock that is trading in the single digits is typically appealing.

Takeaway

Based on the data provided, I must say that I am still a fan of Energizer Holdings. The easy money has likely already been made by this point. In addition to this, the company is not the perfect prospect, in part because of the growth opportunities, or lack thereof, that it is stuck with. But for those who want a high-quality operator that generates significant cash flow and that continues to pay down debt while simultaneously improving its bottom line, this is definitely a hard candidate to pass up.

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