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ENR - Anon Thesis 10 30 2013.docx

ENR - Anon Thesis 10 30 2013.docx

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Published by cnm3d
ENR short write up
ENR short write up

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Published by: cnm3d on Oct 30, 2013
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02/11/2014

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 1CNM3DENR Write UpOctober 30, 2013Recommendation: Sell shortCurrent Price: $98.92Target Price: $76Bull Price: $115Market Cap: $6.1BLiquidity: 590k shares or $63MM per dayDescriptionEnergizer Holdings (ENR) is a 2000 spin out of Ralston-Purina. The company has two divisions:Household Products (primarily batteries) and Personal Care (primarily wet shave, along with femininecare, suntan lotion, wet wipes, etc.). In the fall of 2012, ENR announced a large corporate restructuringwith the aim of ~$150MM a year in permanent cost savings. On July 31
st
, 2013, ENR announced the
acquisition of JNJ’s feminine care division for $185MM.
 ThesisENR is a low quality business. Batteries, which are ~45% of EBIT, are in secular decline and facing an
expanding promotional competitor (SPB’s Rayovac). Wet shave, which is approximately 30
-40% of EBIT,
is lapping a major product launch and facing a larger, promotional competitor (PG’s
Gillette). Inresponse to persistent negative sales in batteries, ENR announced a large restructuring plan with
$150MM in project permanent savings. Despite the failure of ENR’s similar 2011 restructuring plan,
analyst/bulls have factored a near complete success into their estimates.
Further, on ENR’s Q3 call, management announced the loss of two key battery customers which
combined represent a 6% loss in sales on top of -2% industry trends, implying a tough Q4 down >10%and 2014 battery sales down 6-8%. Despite this significant headwind, ENR guided 2014 EPS up mid-single digits, which implies flat battery EBIT and makes 2014 estimates entirely dependent upon
restructuring success. Given ENR’s past failed restructuring and aggressive 2014 guidance, I belie
ve ENRis likely to miss guidance and its present valuation does not adequately discount this risk. In addition,management has recently been consistent sellers after several years of little action.Valuation
 
Target Case: If cost cuts fail to materialize, for 2014, I forecast 19% battery margins (inline with2012) with -6% sales growth and 50 bps of personal care (wet shave) EBIT margin expansion and3% sales growth plus 20 cents in EPS from the JNJ acquisition, which yields ~$6.35 in EPS.Applying a 12x
multiple, ENR’s aver
age for past 5 years, yields $76 per share.
Q1Q2Q3Q4E FY2013EFY2014ECM Est.$2.20$1.80$1.57$1.33$6.90$6.35Street Est.$2.20$1.80$1.57$1.37$6.94$7.37
 
 2
o
 
Note: This is better organic personal care sales and EBIT growth than JNJ has seen since2009.
 
Downside Case: If I model 2014 battery margins at 25% (500bps higher than batteries’ previous
all-time high margins) and with the same assumptions for personal care and JNJ acquisition, Ireach $7.65 in EPS. A 15x multiple yields $115.Risks
 
Continued Multiple Expansion
 –
At 14x 2014 EPS estimates, ENR trades at a discount to theConsumer Staples group, which typically ranges from 16x-20x. While I believe a larger discount
is warranted given ENR’s lack of topline growth, some bulls may disagree.
 
 
Non-GAAP Earnings Beats
 –
As ENR is the midst of a restructuring, there is a significantdifference between GAAP and Non-
GAAP earnings. While I am suspicious of the validity of ENR’s“restructuring” charges, in the near term, ENR has a pass from the buyside to make up earnings
beats via Non-GAAP charges.
 
Takeout
 –
While I believe it is unlikely given the lack of interest at $65, ENR occasionally attractsspeculation as a takeover candidate. However, assuming a 7.5x EBITDA on batteries and a 10xon the rest of the business would only yield $108 per share, ~10% upside from current levels. A12x multiple on the rest of business, aggressive given wet shave difficulties and low quality of remaining brands, would yield $122. (Street 2014 estimates as EBITDA base.)
 
Change in Strategy by SPB (Rayovac) or PG (Gillette)
 –
If a major competitor were to changestrategies
and the battery/wet shave category were to become less competitive, ENR’s shares
would benefit.Catalyst
 
Earnings Disappointments into 2014
 –
As previously stated, I believe 2014 estimates are toohigh for ENR. On both the Q2 and Q3 releases/calls, management has talked down 2014numbers, including explicitly guiding below the Street for 2014. As management has alreadyexited stock and will likely hit their 2013 bonus targets, I believe management will look to lower2014 EPS expectations on the Q4 call.Q4 and 2014 Estimates
 
For Q4, ENR guided battery sales down greater than 10% (customer losses, product exits,industry declines) and implied slow Personal Care (wet shave, etc.) growth
o
 
My estimates for Q4 are roughly inline on sales and slightly below on EPS
 
As ENR’s EPS guidance is “Non
-
GAAP”, not tracking FCF, and I do not trust
management, I put little weight on current EPS
 
During 2014, ENR’s “restructuring charges” should dissipate and ENR’s GAAP
and Non-GAAP earnings will equate, hence I believe the market is focused on2014 EPS
 
For FY 2014, ENR provided initial guidance of mid-single digit (MSD) growth, or ~$7.35, whichroughly corresponds with $780MM in EBIT
o
 
Note: Guidance does not include the JNJ acquisition, which will be discussed below
 
Assuming Personal Care grows topline 3% with 50 bps margin expansion, significantly betterthan achieved in last few years, implies $495MM in 2014 EBIT
 
Further assuming $180MM in Corporate Expense (flat y/y), implies ~$465MM in EBIT, roughlyflat y/y
 
 3
o
 
However, on the Q3 call, ENR announced the loss of two key customers
(Sam’s Club and
Family Dollar) which combined will negatively impact sales by 6% for the next fourquarters, Q4 2013 through Q3 2014, on top of the expected 2% or more industrydeclines
o
 
Assuming a 50% incremental margin on battery sales (likely conservative, explainedbelow), implies a $61MM-$82MM headwind to 2014 EBIT
o
 
Compared to 2012 battery segment EBIT of $400MM and 2013 Non-GAAP EBIT of ~$470MM, this is a very significant drag
 
Even with my conservat
ive assumptions for Personal Care and incremental margin, ENR’s 2014
guidance still implies a complete success of the $150MM restructuring program plus anadditional $10-$25MM in savings
o
 
Note: Street estimates for Battery EBIT are ~$465MM to $480MM, as most analysts areless bullish (i.e. conservative) in their Personal Care assumptions.
 
Given past failed restructurings, my conservative Personal Care assumptions, and incrementalbattery margins likely above 50%, I believe it is highly likely ENR will miss 2014 estimates
 
Note: On July 31
st
, ENR announced the acquisition of JNJ’s feminine care segment
for $185MM,with limited disclosure beyond the price and total sales of $250MM. I assume 8x EBITDA, D&A at2% of sales, and a 27% tax rate to get ~$18MM in Personal Care EBIT and ~$0.20 in EPSaccretion. The actual transaction price and synergies could be wildly different. This is just asimple estimate.
 
Batteries
 
Batteries were ~45% of ENR’s 2012 EBIT
 
 
Global alkaline battery sales are in secular decline due to the shift towards electronic deviceswith rechargeable batteries
o
 
Walkmen have been replaced by iPods, Gameboys by iPads
 
In the past 12 months, global alkaline battery volumes are dropped ~5%, which is on top of HSDvolume declines in the 12-24 month period
 
At the same time volumes decline, ENR faces continued pressure from both SPB (Rayovac) onthe low end and PG (Duracell) on the high end
o
 
SPB has grown market share over the past several years
 
There is virtually no difference between Rayovac and Energizer/Duracellbatteries in terms of performance and/or shelf life
 
A quick Google search will return dozens of scientific articles confirmingthis
 
When consumers traded down in the Great Recession, many discovered that
there was no difference and did not “trade up” as the economy recovered
 
 
SPB has offered better vendor support and gross profit dollars for Rayovacbatteries, which has enabled SPB to gain shelf space at outlets such as WMT,HD, LOW, etc.
2012 EBIT$400Restructing Savings$1502013 Incremental EBIT($24)2014 Incremental EBIT($71)
Implied 2014 EBIT$455Battery Segment ($'MMs)

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