Stock Energizer: Oversold, Own It Short Term (NYSE: ENR)

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Energizing assets (NYSE: ENR) faces weak organic revenue growth, battling gross margin compression due to inflation, fierce competition from generic brands and high debt. Some of these issues are not unique to Energizer. Many companies in the consumer staples sector are facing weak revenue growth and gross margin compression. But none of these companies are trading at 10 times earnings. Energizer has great brands, and the company’s staple products (batteries) have become an essential part of modern life. I am encouraged that the management of the company has made reducing debt and improving gross margins a top priority. When management hits targets to increase gross margins and reduce debt, the stock doesn’t trade at 10 times earnings. My biggest concern is the company’s indebtedness. But, I bought Energizer for $34.45. Currently, it is a short-term holding until the company further reduces its debt.

Any shock that rattles the markets could complicate the refinancing of long-term debt. We may have seen a peak in global GDP growth in 2021. We may also have entered an era of higher interest rates compared to the past decade. If we are entering a period of slow growth, it is good to accumulate good assets that pay dividends and sell for low prices to help us accumulate wealth. If a company has pricing power and competitive advantage, this dividend can increase. Energizer faces intense competition from generic brands Duracell (owned by Berkshire Hathaway) and faces pressure on margins due to inflation. Current trading conditions are not ideal for Energizer, which is why it is trading at a steep discount to similar companies in the consumer staples sector.

Debt is a major concern

The company’s long-term debt is approximately 6 times its fiscal 2022 EBITDA. At the end of the first quarter of fiscal 2022, the company had long-term debt of $3.33 billion. Over the past three years, the company’s long-term debt has hovered around $3.3 billion. (See Exhibit 1: Energizer Long Term Debt). The company can suspend any further share buybacks and focus on using the extra money to pay down debt. But American companies have become accustomed to the Fed sale and believe that if debt or equity markets crash, the US Federal Reserve will come to the rescue. Given this confidence in the Fed, companies bought up shares at record levels in 2021. But even with these record levels of share buybacks, total number of shares increased for S&P 500 companies. Share buybacks benefit management more than shareholders. Warren Buffett would have been doing this for decades if stock buybacks were such a good tool for creating shareholder value. Instead, he reluctantly began buying back shares of Berkshire Hathaway after he felt his company was is trading below its intrinsic value. Most companies indiscriminately buy back shares for the sole purpose of reducing the number of shares without giving too much thought to the valuation of the company.

Exhibit 1: Energizer long-term debt

Energizer Long Term Debt

Energizer Long Term Debt (SEC.GOV, author’s compilation.)

Revenue Growth, Profit Margin and Earnings

The company’s turnover was $846 million for the first quarter of fiscal year 2022, which was flat compared to the same quarter of fiscal 2021. The Company’s Batteries and Lighting segment accounted for 87.9% of revenue in the quarter, and its Auto Care segment accounted for the remainder. The Batteries and Lighting segment accounted for 100% of the company’s reported earnings. Inflation weighed heavily on gross margins with a decline in adjusted gross margin of 320 basis points. In the first quarter of fiscal 2021, its GAAP gross margin was 39.8%, and for the first quarter of fiscal 2022, gross margins were 36.81%, a decline in margins around 300 basis points. In the first quarter of fiscal 2021, its net profit margin was 7.9%, and for the first quarter of fiscal 2022, it was 7.08%, a decrease of approximately 82 points basic.

The company expects EPS between $3 and $3.30 for fiscal 2022. At the current price of $34.43, the company would trade between 10.4x and 11.4x the PE multiple for the fiscal year. 2022. The company expects to generate between $560 million and $590 million in adjusted EBITDA.

Rise in number of shares weighs on EPS and share price

The company’s share count increases to around 72 million for the remainder of fiscal 2022. This is another factor weighing on the share price. In 2019, the company issued a mandatory convertible preferred stock offering of 1.875 million shares at $100 each for total proceeds of $181.73 million after underwriting fees. [3.02%]. The preferred shares were converted into 4.7 million common shares at the end of the first quarter of fiscal 2022. The company was paying a quarterly dividend of $1.875 per share for a total of $16 million in dividends on preferred shares per year.

Since the preferred stock was converted into common stock, the company will pay the common stock dividend of $0.30 per quarter for the stock converted. Since the company has no preferred stock dividend payments, it would save $10.3 million in dividend payments per year. But, the conversion of the preferred shares increases the number of common shares. The company mentioned that assuming there are no additional share buybacks, the weighted average number of shares outstanding for the remainder of fiscal 2022 would be 72 million shares. At the end of the first quarter of fiscal 2022, the company had a weighted average of diluted shares of approximately 67.1 million. The company had a weighted average number of shares outstanding of 68.7 million at the end of 2021. The company entered into an accelerated stock purchase program of $75 million in the fourth quarter of fiscal 2021 to reduce the number of shares. This action helps the company reduce the dilutive effects of converting preferred stock into common stock.

Technical indicators are near oversold levels

Energizer has underperformed both the S&P 400 Midcap Index and the S&P Household Products Index for the past five years. Not only has the company underperformed, but it has also lost money over the past five years. A $100 investment in the company in 2016 was worth just $88.6 in September 2021. But, currently, the stock is near oversold territory. The one-year relative strength index [RSI] and cash flow index [MFI] are both close to oversold territory (See Exhibit 2: MFI, RSI and Bollinger Bands for Energizer). The price is also at the bottom of the Bollinger bands. But, there is no fundamental catalyst to push the stock higher in the short term. Investors could buy this security given the sharp drop since January 18, 2022, hoping for a short-term price increase. This oversold level was my main reason for believing in Energizer at these levels. The S&P 500 index for household and personal products is down just 0.75% since Jan. 18, while Energizer is down 16%. Meanwhile, the S&P 400 Midcap Index fell just 3.12%. Researching Alpha’s factor ratings gives Energizer a B-, implying a valuation discount to both the industry median and Energizer’s 5-year average.

Exhibit 2: MFI, RSI and Bollinger Bands for Energizer

Energizer - Relative Strength Index and Money Flow Index

RSI and MFI technical indicators for Energizer (Looking for Alpha)

Call or put option strategies

Currently, as indicated by the Seeking Alpha factor ratings (See Exhibit 3:, the stock has no momentum, so selling a covered call does not yield a decent return. But, even selling a guaranteed cash put doesn’t seem to have open interest. I’m aiming for around 1% premium by selling a call with a maximum of 6 weeks before the expiration date. Energize is not earning a reasonable buy premium at this time. It looks like the stock may be stuck in a trading range between $33 and $35 until earnings or inflation subside.

Exhibit 3: Alpha factor rating research shows energizer is underrated

Energizer Stock Factor Grades from Seeking Alpha

Factor Grades for Energizer (Looking for Alpha)

Conclusion

Energizer is at oversold levels relative to the rest of the market. Its debt is a major concern and inflation is putting pressure on margins. But, the company’s products are becoming essential in this era of home device proliferation, extreme weather events and a less reliable power grid. I will hold Energizer for the short term, watch my holdings closely and take profits as they grow. I will consider making it a long-term holding if the company achieves an EBITDA multiple of less than 3x.

About Joel Simmons

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