We downgrade Energizer Holdings Inc. (ENR) to Neutral from our previous Outperform rating and lower our price target to $74.00, following the company’s dismal fourth quarter 2010 results. We expect the first half of 2011 to remain weak.
Energizer is one of the largest manufacturers and marketers of batteries, lighting and personal care products.
Fourth Quarter Highlights
Both revenues and earnings per share fell short of the Zacks Consensus Estimates. Earnings missed the expectation due to higher raw material costs and a weak demand for its shaving products. Revenues slid due to lower net sales in the Household Products and Personal Care segments.
Non-GAAP earnings (excluding one-time charges and benefits) of 81 cents per share were well below the Zacks Consensus Estimate of 95 cents, based on a weak revenue growth in the quarter. Earnings per share (EPS) missed the Zacks Consensus Estimate by 14 cents. EPS was down 17.3% year over year from 98 cents.
Revenues declined 2.0% year over year to $1.06 billion in the fourth quarter. Revenues were well below the Zacks Consensus Estimate of $1.12 billion.
Intense competition from the market leader Procter & Gamble (PG) and the BIC Group, inventory destocking, volatile commodity market and weak consumer environment are potential negatives. Moreover, the investors should note that growth at Energizer had been inconsistent on a quarterly basis.
As of September 30, 2010, Energizer’s debt, including the current portion, was $2.29 billion (long-term debt to total capitalization ratio of 52.2%). Over the next twelve months, the company has $300 million of scheduled debt maturities.
Energizer’s net cash (cash less debt, including current portion) was a significant deficit of $1.66 billion, which may add to the company’s leverage, going forward.
Despite a weak fourth quarter, we continue to expect strong top-line growth for Energizer along with an improved operating leverage and organic growth in the second half of 2011.
We believe that the company will benefit from its restructuring initiatives, product innovations, continuous acquisition and a strong balance sheet.
Acquisitions are an integral part of Energizer’s growth strategy. Energizer Holdings has generated top-line growth through strategic expansion (organic growth in the razor blade and battery businesses and a number of acquisitions in personal care).
Most recently, Energizer acquired American Safety Razor Co, the fourth largest manufacturer and distributor of wet shave products and a leading supplier of private-label razors and blades, for $301 million in cash. American Safety is the primary competitor of Energizer. The acquisition of American Safety Razor’s wet shave business will provide an important strategic fit and opportunity for the Energizer Personal Care business.
Energizer Holdings is currently a Zacks Rank #3 stock (short-term Hold rating).