Energizer Just Keeps Going and Going …

by Lawrence Meyers | August 26, 2011 7:00 am

Investor Peter Lynch coined the term “stalwart” in his book One Up On Wall Street. It’s given to large-capitalization stocks that provide investors with slow but steady and dependable growth prospects. For me, that means a company growing around 8% a year or more. Even better, some of these global brands transform from boring, overlooked investments into modest growth plays that provide outsized returns over time.

That brings me to Energizer (NYSE:ENR). Certain items are life necessities, and batteries are among them. Energizer was in fact once known as the Eveready battery. Now, however, that chic bunny with the drum is how we recognize the brand. Today, Energizer batteries are sold in 165 countries and own 25% of the market. If technology had stalled, Energizer might have also. But technology advanced, and now Energizer is also making rechargeable batteries, lithium-based batteries and batteries that conform to whatever new consumer product hits the market.

Energizer also did something Peter Lynch cautioned investors about, which is expanding into areas outside its core competence. He called it “diworseification.” Yet management wisely chose to expand via acquisition, allowing the companies it purchased to remain quasi-independent, so a battery company wouldn’t have to meddle with a non-battery company. What Energizer did, however, was to buy companies whose focus, like Energizer’s, is on disposable consumer products. The purchases included Schick, Edge and Skintimate in the wet-shave arena, as well as sunscreen specialist Banana Boat and the Playtex Products line, which includes Hawaiian Tropic lotions and the Diaper Genie disposal system.

I’d normally be concerned about consumer product companies because of economic exposure. But Energizer deals in items that are constantly replaced, so I find a lot of comfort in that. Energizer grew earnings at an amazing 33% in fiscal year 2010, but is expected to backtrack on earnings by 5% this year. However, analysts project 19% growth in 2012 and 9.6% annualized over the next five years.

The financials for the company look solid. The company holds $630 million in cash against $2.2 billion in debt. Debt service is no problem, as interest expense is only about 5% annually, and less than 20% of operating income. The all-important free cash flow numbers are also rock solid, eliminating any concern about the company being unable to meet any kind of debt service or payback. The company generated $350 million in fiscal year 2009, during the heart of the recession, and $300 million in the trailing 12 months.

Investors should ask what kind of risks Energizer faces going forward. It is a retail company, and that generally means bad news in a recession. However, Energizer also launched its own shaving line this year, and expectations are for it to generate between $75 million and $100 million this year alone. Even without much contribution from this new product, second-quarter earnings leapt 15%. That’s fantastic for a retail company in this environment.

Energizer is a stalwart with a fabulous track record. The company trades at 11.5 times next year’s earnings. Generally speaking, I avoid a PEG ratio of greater than 1, but with stalwarts, their solid footing permits a premium. I’d say the stock is fairly valued, and conservative investors in search of a stalwart can expect 9% annualized growth.

Lawrence Meyers does not own shares of Energizer.

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