With an acquisition and some solid profits, Energizer (ENR) is sparking Wall Street's interest despite its direct battle with consumer goods giant Procter & Gamble (PG).
Energizer, primarily a battery maker, also owns the Schick razor brand. It's trying to buy feminine care products maker Playtex (PYX). The merged company would compete against giant Procter & Gamble, including its huge Duracell division, in nearly every one of its product areas.
On Aug. 13, Energizer shares surged after SunTrust Robinson Humphrey analyst William Chappell upgraded the stock. Energizer's stock had reached an all-time high of $114.17 last month when it announced earnings of $1.06 per share, up 23 cents from a year before, on 8.9% higher sales. Then the stock fizzled in the late-July market sell-off. On Aug. 13, the stock surged almost 11%, to $104.35.
"Energizer's core business has been hitting on all cylinders," Chappell wrote, saying he expects annual growth of 8% to 10% in the next few years. He gives the stock a 12-month price target of $125.
Chappell outlines many reasons for his bullish outlook. For one, Energizer is gaining market share against competitors Duracell and Spectrum Brands (SPC), which makes Rayovac batteries. The company is increasing profits despite the high cost of zinc, a key battery ingredient that costs 70% more than a year ago. Schick is doing well despite new product launches from Procter & Gamble's Gillette. Based on some research-and-development expenses from late last year, Schick may be coming out with some new, exciting shaving products, Chappel says. Plus, a busy hurricane season could boost storm-related battery sales, he figures.
Plus, the analyst is optimistic about the Playtex deal. Chappell writes: "The real reason to own the stock over the next two years is the opportunity from the pending Playtex acquisition."
The $1.9 billion deal was announced before current problems on credit markets started to threaten the worldwide mergers-and-acquisitions boom. However, the $18.30 per share in cash offer isn't dependent on new bond market financing, Chappell notes.
He expects major savings and synergies from the deal, adding an extra 40 cents per share to Energizer's earnings in the first year. Many are hoping Energizer, which is distributed in 150 countries, will push Playtex's products into dozens of new markets.
Other analysts also like the Energizer-Playtex deal. "Betting against Energizer and its savvy management team can be quite painful," Deutsche Bank (DB) analyst Bill Schmitz Jr. wrote recently. The Playtex deal adds "another layer of sales and earnings growth potential."
However, even with all the positives, there are reasons to be skeptical. Energizer, by expanding into personal care products, is continuing its heads-on challenge with Procter & Gamble, a tough competitor.
Bear Stearns (BSC) analyst Peter J. Barry calls Energizer a Procter & Gamble "wannabe," and that's not a compliment. "We continue to believe that Energizer will be hard pressed to match Procter & Gamble's deep pockets and significant scale," Barry wrote last month.
He says Energizer's operational performance has been "anemic" for the last two years, with much of its profit growth driven by share buybacks. (If fewer shares are outstanding, earnings per share rise even if overall profits hold steady.)
Energizer's price-to-earnings ratio is much higher than usual for the battery maker, analysts note. A few analysts warn that its high valuation could make the stock vulnerable to fall further if competition heats up, expenses rise, or acquisitions go awry.