The Energizer Bunny has been one of the longer-running marketing icons in Corporate America. Unfortunately, its parent, Energizer Holdings Inc. (NYSE: ENR), has not been a great victory for investors in recent years. After having peaked at $65 a share in 2018, Energizer was almost as low as it was five years ago before a recent rebound. That’s all about to change if Merrill Lynch’s Olivia Tong is correct.
Monday’s top analyst upgrades and downgrades included an unusual upgrade on Energizer, with Merrill Lynch making a rare two-notch upgrade on the shares. The rating went from Underperform to Buy rather than Neutral, and the price objective was raised to $48 from $35.
Energizer previously closed at $40.64 a share, in a 52-week range of $32.54 to $64.00 and with a consensus target price that was already at $48.73. This new call represented upside of about 18.1%, and Energizer also comes with that $1.20 annualized dividend that generates a yield of 2.95% and would have to be added onto the gains for a total return calculation. As a reminder, most analyst calls with Buy and Outperform ratings in S&P 500 companies come with 8% to 10% projected returns at this stage in the 10-year bull market.
Olivia Tong’s report does not call Energizer riskless, and there are still some issues that have to be worked out internally. She said:
Our prior rating of Underperform had been premised on our view that Auto Care challenges would take longer to remedy and that Battery cannibalization would be more onerous than the market had previously priced in. In addition, the forced sale of Varta curtailed cash for debt paydown. We continue to see potential that the integration of the recently acquired assets could result in volatility near term, but with those factors now in the base and management’s solid track record in legacy Energizer giving us some confidence in their ability to turn the business around, we up our rating, even if fixes could take some time. Much still needs to be done, but major risks are now known, with short interest ~20% of the float and shares down 40% over the last year vs XLP (ETF) up 13%. This puts shares well below peers at 12x P/E and 10x EBITDA.
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The new $48 target is based on future valuations of 11 times EBITDA and 14 times the firm’s earnings per share of the calendar 2020 estimate.
Merrill Lynch also raised its earnings estimates ahead, to $2.98 a share for fiscal year 2019 (versus $2.92 from Refinitiv) and to $3.25 (versus $3.23 from Refinitiv) for 2020. Part of this was in what already was being tracked as modestly better trends and pricing power (even before factoring in hurricane-related demand). Tong said:
Stemming cannibalization in Battery and restoring retail relationships and innovation in Auto Care are no small feats, but we believe expectations have been sufficiently reset with consensus FY20e EPS -13% YTD. In our view, ENR does not need an oversized beat to drive shares higher from current levels; the legacy business is solid and stabilizing acquired assets while providing incremental visibility into delevering/key challenges should offer relief.
One final note about Energizer’s sudden “moving from Sell to Buy” stance is that the competition in the battery space has been rational for a number of years and the firm expects that to continue. Management also is viewed as posting solid execution, even as the company’s higher leverage does keep some near-term risks.
Energizer shares were trading up 2.7% on Monday to $41.75, and the 450,000 shares or so that had traded in the first 90 minutes on Monday compares with 1.04 million shares on an average day’s full volume.
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