Should You Buy It?: No Zap in Energizer

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Energizer ( ENR) shares have been on a wild ride of late. At Wednesday's closing price of $49.42, the stock is down 9% year-to-date, but up a full 60% from its November lows.

The company is one of the leading battery producers in the world. Energizer also generates about 40% of its sales from personal care brands including Playtex and Schick.

The company posted mixed fiscal first-quarter (ended December) results on Jan. 27. Energizer earned $1.93 a share, which was a full 20 cents above the consensus analyst estimate. On the other hand, revenue fell 12% from the previous year to $1.04 billion, coming in $40 million short of expectations. Even so, the gross margin improved 200 basis points from the previous year.

Management beat profit expectations primarily because of lower input costs and a smaller foreign currency effect than expected. Energizer generates nearly half of its sales overseas. The company also cut advertising spending by 22% from the previous year, which could hurt further earnings growth at the expense of trying to boost near-term earnings.

The stock has reacted well to the numbers, gaining 12% in two sessions since the quarterly report. With that in mind, I'm here to answer readers' questions: Should you buy it? Does Energizer still hold value at current levels, or should investors avoid chasing the stock?

Ahead of the quarter, two brokerage analysts had downgraded the company, citing valuation and the prospect of lower battery sales (60% of total revenue). In fact, according to a UBS note on Jan. 26, top customer Wal-Mart ( WMT) is cutting back on the amount of space it devotes to batteries in its domestic stores.

There's also the fact that batteries are one of many consumer products that are prone to see consumers trade down in a declining economy. Energizer faces a lot of competition from generics and store brands. And even if shoppers continue to favor premium brands like Energizer, the company's margins could be hit if consumers don't pay up for premium products like lithium batteries with a longer expected life.

At current levels, the stock is valued at just 9.1 times expected fiscal 2009 (ending September) earnings of $5.44 a share, which is a 25% discount to the S&P 500. That said, I'm concerned about the mountain of debt on the company's balance sheet.

While management has yet to file a 10-Q statement with the SEC for the December quarter, Energizer had just $171.2 million of cash on its balance sheet compared with $2.96 billion of total debt (197% of shareholders' equity) at the end of fiscal 2008.

Energizer shares have already enjoyed a big run over the past two months despite poor demand visibility for 2009. Without the cushion of a dividend, I believe readers should avoid the stock at current levels.


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Know what you own: Other companies in the industrial electrical equipment group include ABB (ABB), Eaton (ETN), Nidec (NJ), Rockwell Automation (ROK) and Ametek (AME).

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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