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

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Energizer Holdings (NYSE:ENR) is facing sluggish organic revenue growth, fighting gross margin compression due to inflation, tough competition from generic brands, and a high debt load. Some of these problems are not unique to Energizer. Many companies in the consumer staples sector face low revenue growth and gross margin compression. But, none of those companies are trading at 10x earnings. Energizer has excellent brands, and the company’s core products (batteries) have become an essential part of modern life. I am encouraged that the company’s management has made reducing debt and improving gross margins a top priority. When the management achieves the goals of higher gross margins and lower debt, the stock will not be trading at 10x earnings. My biggest concern is the company’s debt load. But, I bought Energizer at $34.45. Currently, this is a short-term holding until the company reduces its debt further.

Any shock that rattles the markets could make it tougher to refinance long-term debt. We might have seen global GDP growth peak in 2021. We may also have entered an era where interest rates will be higher compared to the last decade. If we are entering a period of slow growth, it is good to accumulate good dividend-paying assets selling cheaply to help us compound wealth. If a company has pricing power and a competitive advantage, that dividend can grow. Energizer faces intense competition from Duracell (owned by Berkshire Hathaway) generic brands and faces margin pressure due to inflation. The current business conditions are not ideal for Energizer, which is why it is trading at a steep discount compared to similar companies in the consumer staples sector.

Debt Load is a Major Concern

The company’s long-term debt is about 6x its FY 2022 EBITDA. At the end of Q1 FY 2022, the company had long-term debt of $3.33 billion. For the past three years, the company’s long-term debt has hovered around $3.3 billion (See Exhibit 1: Energizer’s Long-term Debt). The company can pause any new share repurchase and focus on using the extra cash to pay down debt. But, U.S. corporations have gotten accustomed to the Fed Put and believe that if the debt or equity markets seize up, the U.S. Federal Reserve will ride to the rescue. Given this belief in the Fed, companies bought back shares at record levels in 2021. But, even with these record levels of share buybacks, the total share count has increased for S&P 500 companies. Share repurchase benefits management more than shareholders. Warren Buffett would have done it for decades if share buybacks were such a great tool to create shareholder value. Instead, he reluctantly started buying back Berkshire Hathaway shares after he felt his company was trading below its intrinsic value. Most companies indiscriminately buy back shares with the sole aim of reducing share count without much thought to the valuation of the company.

Exhibit 1: Energizer’s Long-term Debt

Energizer Long-Term Debt

Energizer’s Long-term Debt (SEC.GOV, Author Compilation.)

Revenue Growth, Profit Margin, and Earnings

The company’s revenue came in at $846 million for Q1 FY 2022, which was flat compared to the same quarter in FY 2021. The company’s Batteries and Lights segment accounted for 87.9% of the revenue in the quarter, and its Auto Care segment accounted for the rest. The Batteries and Lights segment accounted for 100% of the reported profits for the company. Inflation took a big bite off gross margins with an adjusted gross margin decline of 320 basis points. In Q1 FY 2021, its GAAP gross margin was 39.8%, and for Q1 FY 2022, the gross margins stand at 36.81% – about a 300 basis points decrease in margins. In Q1 FY 2021, its net income margin was 7.9%, and for Q1 FY 2022, it came in at 7.08% – a drop of approximately 82 basis points.

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

Increased Share Count Weighs on EPS and Stock Price

The company’s share count is increasing to about 72 million for the rest of FY 2022. That is another factor weighing on the share price. In 2019, the company had issued a mandatory convertible preferred share offering of 1.875 million shares at $100 each for total proceeds of $181.73 million after underwriting fees [3.02%]. The preferred stock converted to 4.7 million in common shares at the end of Q1 FY 2022. The company was paying $1.875 per share quarterly dividend for a total of $16 million in dividends on the preferred stock annually.

Since the preferred share has converted to common, the company will pay the common share dividend of $0.30 per quarter for the converted shared. Since the company does not have a preferred share dividend payment, it would save $10.3 million in dividend payments annually. But, the preferred share conversion increases the common share count. The company mentioned that assuming no additional share repurchases, the weighted average shares outstanding for the remainder of the fiscal year 2022 would be 72 million shares. At the end of Q1 FY 2022, the company had weighted average diluted shares of about 67.1 million. The company had weighted average outstanding shares of 68.7 million at the end of 2021. The company entered into a $75 million accelerated share purchase program in the fourth quarter of FY 2021 to reduce the share count. This action helps the company reduce the dilution effects from converting the preferred stock to common.

Technical Indicators are Near Oversold Levels

Energizer has underperformed both the S&P 400 Midcap index and the S&P Household Products index over the past five years. Not only has the company underperformed, but it has also lost money in the past five years. A $100 investment in the company in 2016 was only worth $88.6 by September 2021. But, currently, the stock is near oversold territory. The one-year Relative Strength Index [RSI] and Money Flow Index [MFI] are both near 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 move the stock upwards in the short term. Investors might buy this stock given the steep decline since January 18, 2022, hoping for a short-term price boost. This oversold level was my primary reason to believe in Energizer at these levels. The S&P 500 Household and Personal Products index has declined just 0.75% since January 18, while Energizer has declined by 16%. Meanwhile, the S&P 400 Midcap index has declined only 3.12%. Seeking Alpha’s factor grades gives Energizer a B- implying a valuation discount to both the sector 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 (Seeking Alpha)

Call or Put Option Strategies

Currently, as the Seeking Alpha factor grades indicate (See Exhibit 3: Seeking Alpha Factor Grades Show Energizer is Undervalued), the stock has no momentum, so selling a covered call does not yield a decent return. But, even selling a cash-secured put does not seem to have any open interest. I aim for approximately 1% in premium from selling a call with a maximum of 6 weeks left in the expiration date. Energize does not yield a reasonable call premium at this time. It seems like the stock may be stuck in a trading range of between $33 and $35 until the subsequent earnings or inflation tapers.

Exhibit 3: Seeking Alpha Factor Grades Show Energizer is Undervalued

Energizer Stock Factor Grades from Seeking Alpha

Factor Grades for Energizer (Seeking Alpha)

Conclusion

Energizer is at oversold levels compared to the rest of the market. Its debt is a significant concern, and inflation is pressuring margins. But, the company’s products are becoming essential in this era of device proliferation at home, extreme weather events, and a less reliable power grid. I will own Energizer for the short-term, monitor my holdings closely, and take profits as it rises. I will consider making it a long-term holding if the company gets debt to EBITDA multiple of below 3x.

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