Energizer – stabilizing, but far from energized. (NYSE: ENR)

In the spring, I feared that the shares of Energizing (NYSE: ENR) they lacked energy. Following the acquisition of the battery business of Spectrum Brands (SPB) in 2018 and the acquisition of Spectrum’s car care business, the company has been struggling with a debt overload and the fact that the benefits of the promised contract did not materialize.

While the adjusted earnings multiples look low, it is a challenged position, negative organic growth and high leverage, which made me very wary of getting involved in the stock. So far, the company is stabilizing sales and growing (adjusted) earnings, all of which are creating some initial green shoots, though there’s still a long way to go.

Energizer – Not an energizer for investors

The current Energizer came into being when it announced a $2.0 billion cash deal to acquire the battery and portable lighting business from Spectrum in early 2018.

With the addition of alkaline, carbon zinc, and rechargeable batteries carried under brand names such as Varta and Rayovac, the company was on track to generate approximately $2.5 billion in sales while being highly profitable.

Hard to believe, but the stock was trading around $50 at the time, buoyed by pro forma earnings guidance of about $5 per share, all while leverage ratios were reported at a high ratio of about 5 times.

Fast forward to 2023, the company grew sales to $3.0 billion, well ahead of 2018’s pro forma numbers, on the back of organic achievements, but more so on the back of another $1.25 billion deal with Spectrum Brands, the company acquiring this time the global vehicle. care business.

Adjusted earnings came in at about $3 per share, down about 40% from 2018 pro forma numbers, as the difference to GAAP earnings was substantial and also included cash costs. With net debt holding steady around $3.1 billion, not down due to buybacks and dividends, leverage remained sky-high as EBITDA just crossed the $600 million mark.

2024 – No recovery in sight

The company initially guided for 2024 sales to be flat at best, but possibly down single digits. Despite the anticipated pressure on the top line, the company guided for adjusted EBITDA to improve slightly to $600-620 million, which it suggested would result in adjusted earnings of about $3.20 per share.

In February, the company reported a 6% decline in first-quarter sales, with organic sales declines reported of about 7%. Adjusted earnings were reported at $0.59 per share, as GAAP earnings came in at just three cents per share. The company reiterated its guidance for the full year but is ramping up its cost-saving ambitions to achieve this as weak top-line developments open the door to negative sales surprises.

Despite trading at just 9x adjusted earnings at $28 per share, I was cautious in April. This comes in the context of negative organic growth, the fact that more devices can be (re)charged on their own, as well as the fact that earnings are very tight and leverage is stubbornly high. There was also the matter of an ongoing price-fixing class action, but one of the few positives was that they had no major debt maturities until 2027.

Only with cheapness, never being a great argument to invest, I was leaning very cautiously.

Trading Flat

Since April, the company’s stock has mostly traded around $30, now trading at $28 and change per share.

In May, Energizer reported a 3% drop in second-quarter sales, in line with organic sales declines. Amid cost savings from the ¨Project Momentum¨ program and lower input costs, adjusted earnings actually improved eight cents to $0.72 per share because, frankly, the difference between GAAP earnings narrowed, with those earnings coming in at $0.45 per share (and the difference largely related to restructuring costs).

For the third quarter, the company expected organic sales to increase by one point, with adjusted earnings seen at an average point of $0.65 per share.

In August, third-quarter sales were basically reported at $701 million, with organic growth reported at just over one percent. Adjusted earnings of $0.79 per share beat guidance by a wider margin as a huge impairment charge drove a net loss of $0.61 per share.

Amid a hiatus in share buybacks, net debt remained flat at $3.08 billion and with EBITDA seen at a midpoint of $615 million for the year, leverage ratios are reported at 5.0x. That’s based on fourth-quarter organic sales, which were seen as flat, with adjusted earnings seen at a midpoint of $1.15 per share, which actually implies full-year earnings coming in at about 3 $.25 per share, beating the original earnings outlook for the year.

Locked and loading

Honestly, the situation hasn’t changed much. Energizer has halted buybacks and is seeing the first fruits of its cost-savings program, at least in adjusted earnings numbers.

That’s comforting because the company is seeing steady sales and is on track to grow adjusted earnings quite a bit here. Amid a halt in share buybacks, there is potential for net debt to decline from here on out, perhaps the first innings of deleveraging.

This causes me to continue to maintain my constructive but reserved position. Earnings multiples look attractive and while some stability is seen in the business, earnings remain very tight and leverage has yet to come down, with no quick results in sight.

While some momentum appears to be building under the hood, amid higher margins, investors are being paid to wait. A dividend of $1.20 per share gives a decent dividend yield of >4%, and while that’s stable, the question is of course whether those payouts can be sustained if things take an unexpected turn for the worse.

For now, I see the potential, but since investors usually make money by investing in good and great businesses, I’m not willing to pull the trigger here yet because the stock isn’t that cheap considering the leverage situation.