More Analysts Should See Energizer Holdings As A Buy: Here Is Why

Key Points

• Shares of Energizer Holdings are rising amid reporting first quarter 2023 earnings, sending mixed signals to Wall Street analysts.
• A disconnect between net income and free cash flow would suggest hidden momentum within the company.
• Management initiatives to expand margins and improve inventory management led to near-record quarterly free cash flows. These results allowed debt reduction payments and dividend increases. 
• Revenue reductions came from a good cause; investors can expect the longer-term trends to deliver double-digit returns in the stock price. 

Energizer Holdings NYSE: ENR shares are rising by 6.75% on Monday's trading session amid reporting formidable margin improvements and other positive developments. Energizer analyst ratings suggest the stock only has an 8% upside from today's prices. Considering how much the shares rallied in a single day, market sentiment challenges analysts to consider more potential. 

Despite an initial shock to the company's top line, Energizer's financials will show a first-quarter of 2023 packed with momentum. The top-line revenue reduction, which will be a win for investors, came from management's decision to exit some lower-margin battery customers, one of the many initiatives taken to reduce debt burdens and increase margins for the battery maker.

Retail versus Wall Street Drivers

Energizer showcased a net loss of $236 million for 2022, while it only reported a negative free cash flow of $77 million. There is a similar trend between the two financial items year-on-year. Net Income for the first quarter of 2022 was $19 million, and for that of 2023 increased by 110% to be reported at $40 million. Consequently, free cash flow increased by larger magnitudes from negative $155 million in the first quarter of 2022 to positive free cash flow of $192 million in 2023.

Wall Street analysts typically emphasize a business's net income; However, Energizer is a retail company, so investors would be better served by dissecting these free cash flow trends. CEO Mark LaVigne stated in a press release, "Our focused efforts behind restoring gross margins and reducing working capital drove free cash flow of nearly 20% of net sales, enabling us to pay down over $100 million in debt in the first four months of the fiscal year."  

Investors can catch an earlier trend before analysts can get a hold of them and upgrade the stock accordingly. As free cash flow conditions improve due to improved inventory management, expanding margins, and a focus on debt paydown, those invested in Energizer's equity securities will see the bulk benefits. As a side effect of improving free cash flow, management declared a quarterly dividend per share of $0.30. As a result, Energizer dividend yield shows investors can earn upwards of 3.6% per year; this matters because the stock historically has yielded 2.5% to 3.0%. 

The Energizer Bunny Keeps on Bouncing

While a 0.2% revenue decline during the 12 months failed to keep up with inflation, it stemmed from a good cause. Management implemented its new strategies and "... exited some lower margin profile battery customers and products resulting in approximately 1.5% decline to organic sales." The loss of volume and revenue from these decisions was offset by benefits from global pricing actions within the battery and auto care business, which contributed to a 9.5% increase in organic sales to keep up with inflation. 

This matters to the stock price since, as of the first quarter of 2022, gross margins were 34.8% and saw a 2.2% increase to end at 37% in 2023 due to revenue and inventory management decisions. Achieving further cost-reduction initiatives and implementing better inventory management systems, management maintained previously issued financial guidance for the year 2023. Investors can expect organic revenue growth to be in the low single digits, which may seem a bit conservative considering the company's five-year 11% compounded annual growth rate (CAGR). 

Investors could be in for a pleasant 2023 in ENR stock, as management expects a further cost reduction of $30 million to $40 million. These cost reductions could bring the company back to its 46.2% gross margins of 2018 when the stock traded at an 18-20x price-to-earnings multiple. Regarding 2023 earnings per share, management guidance would suggest $3.00 to $3.30 by the end of the year, placing ENR's next-twelve-months P/E ratio at approximately 11.1x. If management can deliver on further margin expansion to 2018 levels while also providing EPS of $3.00 to $3.30, ENR stock could rally to appropriate 18-20x multiples for a price between $54-$66.

The energizer chart would suggest a tight and robust channel pattern, formed around the $45-$53 range since 2016. This channel pattern showcased breakouts toward the $65 peak price in 2018 (in-line with peak margins) and lows of $40, excluding any COVID-19-related effects on the stock price. Historically high dividend yields, bottoming technical indicators, and higher implied valuations all come together to deliver investors an opportunity for double-digit returns in ENR stock.