About Energizer’s Net Income Growth, Reorganization and Dividend Growth (NYSE: ENR) | Private Equity Weekly

Energizer Holdings Inc. (NYSE: ENR) promises to reduce net leverage in 2024 and has a dividend yield approaching 4%, which seems interesting.Additionally, I also expect further improvements in operational efficiency in battery manufacturing and distribution due to ongoing project momentum Profit Recovery Plan. Additionally, if recent acquisition efforts are successful, I believe Energizer is likely to grow its net earnings over the next few years. Changing retail landscape or competition and goodwill impairment pose certain risks. All things considered, I believe the company remains undervalued.

Energizer

Energizer offers a variety of home and automotive products as well as lighting products. Its batteries cover technologies such as lithium batteries, alkaline batteries, zinc-air batteries and silver oxide batteries, and its main brands include Energizer, Eveready and Rayovac.

Additionally, they offer car care products, Looks and scent to performance and conditioning charging. Additionally, in the automotive performance space, they offer fuel and oil additives under the iconic STP brand. Its lighting product line includes portable flashlights as well as regional products from well-known brands such as Hard Case, Dolphin and WeatherReady.

As you can see in the chart below, most of the revenue comes from battery sales, which Energizer sells in North America and overseas. I think diversification is one of the assets that Energizer probably doesn’t report on its balance sheet.

The company owns thousands of trademarks worldwide, including Energizer, Rayovac and Eveready, as well as other related brands. They distribute their products through an extensive retail network, ranging from large chain stores to specialty stores and e-commerce.

Its marketing strategies cover both modern trade, such as large retailers, and traditional trade, which is more common in developing markets. I think this diversified model allows them to reach a wide range of consumers.

Given the business model, I think it’s worth taking a look at the recent earnings, which have performed better than expected. Normalized actual earnings per share and quarterly revenue both beat analysts’ expectations.

Energizer also pointed to guidance that includes 2024 adjusted EBITDA in the range of $600 million to $620 million, and adjusted earnings per share of close to $3.10 to $3.30. Additionally, Energizer noted that net leverage is likely to fall below 5x soon due to debt repayments.

We also expect adjusted EBITDA to be $600 million to $620 million and adjusted earnings per share to be $3.10 to $3.30. source: Q1 FY24 Press Release

Assets: Recent acquisitions could lead to business growth

Considering the cash total and the current ratio of over 1x, I think Energizer reports significant liquidity to fund future acquisitions or develop new products. As of December 31, 2023, the company reported $241 million in cash, inventory worth $640 million, and total current assets of nearly $1.47 billion.

Energizer reported goodwill of nearly $1 billion and other intangible assets of $1.2 billion. These assets come from previous acquisitions. With this in mind, I believe Energizer has expertise in the M&A market and may announce new acquisitions in the coming years.Readers may want to take a look Previous merger agreementas well as the acquisition agreement signed by the company.

Recent acquisitions include batteries and more Belgian manufacturing assets, and raw materials from APS. In this article, under my most optimistic scenario, I assume that Energizer’s recent acquisitions may accelerate future net sales growth. I assume median net sales growth is closer to 1.9% between now and 2034.

Liabilities: The total amount of debt is not small

Energizer obtains financing from commercial providers and has total accounts payable of $374 million. However, the company also received financing from banks. The total debt is not small. In its last report, the company noted debt of $3.3 billion.

Considering the total amount of financial debt, I did take a close look at the interest rate being paid. The company structures its debt through a credit agreement that includes a $400 million revolving credit facility and a $550 million secured term loan due in 2027. Additionally, they appear to have made adjustments to the agreement to obtain additional financing and refinance certain senior debt. notes. The interest rates paid are close to 3.5% and 6.5%. With these numbers in mind, I assume valuations closer to 7% and 8% in my two case scenarios.

Net revenue catalyst: Battery market growth is likely to drive organic net revenue growth

In my best case scenario, I think Energizer will likely see net sales growth due to the growth of the battery market. It is not easy to make accurate predictions about the growth of Energizer’s target market. The company offers different types of batteries and solutions. For example, the alkaline battery market is expected to grow at a CAGR of close to 5%.

The alkaline battery market size will exceed US$8.84 billion in 2023 and is expected to reach approximately US$14.43 billion by 2033, with a compound annual growth rate of 5.03% from 2024 to 2033. source: Prioritize research

Net Sales Catalysts: Innovation, New Brands and New Technologies

Energizer’s business strategy focuses on global expansion, continuous innovation and adapting to market trends. Likewise, it seeks to strengthen existing brands, develop new products and explore growth opportunities in emerging areas. Operational efficiency, sustainability and excellent customer experience are priorities.

I think in this industry, investing in technology and talent is considered key to staying competitive. In my most optimistic scenario, I think these moves will likely lead to net revenue growth and net sales growth.

Catalyst for net profit growth: optimization and streamlining of organization

In the most recent quarter, Energizer noted an expansion of its Momentum profit recovery program, which it expects will accelerate the optimization of manufacturing, distribution and global supply chain networks. In my most optimistic scenario, I think these efforts will lead to net profit growth.

The company’s board of directors approved the expansion of Project Momentum’s profit recovery program and authorized company management to determine final action on the program. The program expansion includes an additional year that will allow us to further optimize our battery manufacturing. Source: 10-Q

In this regard, the company noted restructuring and related costs totaling approximately $22 million last quarter, significantly higher than in 2022.

In my best case scenario, WACC will likely be lower due to debt repayment.

inside Last presentation to investors, the company noted a significant drop in total debt. Net leverage dropped from 6.1 times to below 5.3 times. In my most optimistic scenario, recent debt reduction and potential new debt reduction could lead to an increase in net income and a small reduction in WACC. Note that I assume the cost of capital is closer to 6.9%-7% in the best case scenario.

My optimistic case scenario implies a valuation of $37 per share

In my most optimistic case, I think recent restructuring efforts, growth in the battery market, and debt reduction will likely lead to net income growth and operating margin growth.

It’s also worth noting that I considered Energizer’s previously reported income statement. I do believe my numbers are fairly conservative.

Based on my estimates for the company’s future, I use total revenue in 2034 of $3.848 billion, cost of products sold close to $2.247 billion, and gross profit of $1.6 billion.

In addition, along with selling, general and administrative expenses of nearly $17 million, and advertising and promotion expenses of $257.148 million, I also included $8 million of research and development expenses in 2034.

Total expenses will be nearly $756 million and operating income will be $844 million. In the end, I also earned a net profit of $208 million, which translates into a profit margin of 5.43%.

The payout ratio is nearly 40%, and I have $83 million in dividend payments in 2034. I also assume a WACC of 7%, which means the net present value of the dividend payment is close to $686 million.

Additionally, an exit P/E ratio of 21x would bring the total valuation to nearly $2.6 billion, with a price per share of $37.

My pessimistic case scenario implies a valuation of $23 per share

In my bearish case scenario, I believe some of Energizer’s initiatives, including restructuring efforts, debt reduction, or M&A efforts, were unsuccessful. As a result, net sales growth and net profit growth were smaller than previously the case.

In a less optimistic scenario, total revenue will be $3.709 billion in 2034, with median revenue growing at 0.5%. As for the cost of selling products, I’m going to assume $455 million, which would give us $1.542 billion in gross profit.

In addition, selling, general and administrative expenses are likely to be approximately $467 million, including nearly $32 million in advertising and promotion expenses and $21 million in research and development expenses.

By 2034, total expenses will be close to $567 million, generating operating income of approximately $1.017 billion. Ultimately, net profit in 2034 could be close to $148 million.

Also assuming a payout ratio close to 40%, the dividend payout in 2034 will be very close to $59 million. In addition, considering that the WACC is 8%, the exit price-to-earnings ratio is 20 times, the total valuation is approximately US$1.623 billion, and the stock price is approximately US$23.

Note that I believe my P/E is close to the current P/E multiple, which is also the lowest it has been in the past four years.

risk and competition

I believe Energizer poses a risk to the brand’s reputation and continued success, as they are critical in a highly competitive and evolving environment. In addition, the arrival of new sales channels such as e-commerce and large-scale price reductions, as well as changes in business models such as private label and direct-to-consumer sales, also bring challenges.

Potential risks include damage to brand image, quality or safety issues, misleading advertising lawsuits, and product recalls. These factors could adversely affect the Company and its financial condition.

In addition, considering the total amount of goodwill, I think Energizer may face the risk of goodwill impairment, or intangible impairment. Therefore, I think book value per share is likely to decline, as are net profit expectations.

In my opinion, the company faces stiff competition at both domestic and global levels. The main drivers for the battery business are device usage, consumer demographics and disasters, while for auto care the main drivers are fleet size and age and mileage.

my thoughts

Energizer Holdings places a strong emphasis on brand protection, innovation, and geographic and product diversification. Additionally, I believe the “Momentum Project” profit recovery plan and recent restructuring efforts will likely lead to net profit growth in the coming years. Additionally, Energizer has managed to reduce debt very effectively and maintain compliance with debt agreements. Energizer faces significant challenges due to fierce competition, a changing retail landscape, and even the risk of deteriorating brand image. All things considered, I think Energizer is trading undervalued.