Can Energizer Holdings Energize Your Holdings?
F.A.S.T. Graphs | Oct 11, 2013 02:50AM ET
Most of us know Energizer Holdings (ENR) from its self-titled, world’s longest lasting battery line. Or perhaps you associate the brand with the drumming Energizer bunny. You know the one that keeps going and going and going and… you get the point. However, what might not be readily apparent is the fact that Energizer Holdings is much more than a one-trick bunny.
In 2002 100% of Energizer Holdings’ business came from selling batteries; granted these widely recognized Energizers translated to nearly $2 billion in revenue and just over Earnings and Price Correlated F.A.S.T. Graph below.
Here we see that Energizer’s market price previously began to deviate from its justified earnings growth; starting to become overvalued in 2007 and becoming undervalued during the most recent recession. Today, Energizer appears undervalued to fairly valued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, Energizer Holdings’ shareholders have enjoyed a compound annual return of 10.9% which correlates closely with the 10.8% growth rate in earnings per share. A hypothetical $10,000 investment in Energizer on 03/31/2000 would have grown to a total value of $40,548.01, without reinvesting dividends. Said differently, Energize shareholders have enjoyed total returns that were roughly 3.2 times the value that would have been achieved by investing in the S&P 500 over the same time period.
But of course – as the saying goes – past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs a variety of potential catalysts and opportunities for growth were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
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Fourteen leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return growth rate for Energizer of 8.1%. In addition, Energizer is currently trading at a P/E of 13.3, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Energizer Holdings’ valuation would be $152.24 at the end of 2018, which would be an 11.8% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
Now, it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Energizer to an equal investment in a 10-year treasury bond, illustrates that Energizer’s expected earnings would be 4.1 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of Energizer Holdings we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
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