What a brutal six months it’s been for Energizer. The stock has dropped 31.2% and now trades at $16.85, rattling many shareholders. This might have investors contemplating their next move.
Is now the time to buy Energizer, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Energizer Not Exciting?
Even with the cheaper entry price, we're cautious about Energizer. Here are three reasons we avoid ENR and a stock we'd rather own.
1. Core Business Falling Behind as Organic Growth Slumps
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
The demand for Energizer’s products has barely risen over the last eight quarters. On average, the company’s organic sales have been flat.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Energizer’s revenue to rise by 1.4%. This projection doesn't excite us and implies its newer products will not catalyze better top-line performance yet.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Energizer’s $3.33 billion of debt exceeds the $214.8 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $589.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Energizer could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Energizer can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Energizer isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 4.9× forward P/E (or $16.85 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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