Edgewell Personal Care Co (EPC)

[Enterprising Investor]

Edgewell Personal Care: Cheap Buyout Candidate (3/01/17)

Pressure is rising in the industry to accelerate growth. Edgewell, with its popular brands, could find a suitor.

By David Englander

Since it was separated out of Energizer in July 2015, shares of Edgewell Personal Care (ticker: EPC) have languished. The stock, at a recent $73.83, sits 20% below where it traded on the first day of its independence.

Business conditions have been difficult for Edgewell, as they have been for the entire consumer goods industry. Slow-growing markets and intense competition have weighed on results. That’s let some air out of the stock’s valuation.

On the weakness, the shares look attractive.

Edgewell has a top-notch personal care franchise in the shaving, sun-care, and feminine-care products businesses. Its brands, which include Schick, Skintimate, Hawaiian Tropic, and Playtex, are No. 1 and No. 2 in their markets, and barriers to entry are high.

Notably, in shaving, Edgewell’s Schick razor business is the only major competitor behind Procter & Gamble’s Gillette. Edgewell, too, is a bite-sized company (market cap: $4.2 billion) in a market that’s dominated by giants like Procter & Gamble and Unilever.

Its small size and stable of high-quality brands could garner Edgewell the interest of a suitor. While that’s been a possibility for some time, pressures in the industry to accelerate growth appear to be building and could lead to a step up in acquisition activity. A little over a week ago, Unilever spurned a $140 billion buyout offer from Kraft Heinz.

In a report out this month, RBC Capital Markets analyst Nik Modi puts a takeout value for Edgewell at $114 a share, more than 50% above the current share price.

That’s equal to 17 times this year’s estimated Ebitda (earnings before interest, taxes, depreciation and amortization), and in-line with past deals for scare, high-quality consumer goods assets, like the 2010 deal for SSL, the maker of Durex condoms, and the 2011 buyout for hair and skin products specialist, Alberto-Culver. Modi lists a number of prospective acquirers, including Unilever, Reckitt Benckiser, and Colgate-Palmolive.

What makes Edgewell particularly attractive is its lack of exposure in emerging markets. A multinational could use its scale and distribution network to grow the business. There’s also a margin opportunity. Edgewell’s margins in its shaving business are roughly 20% compared with P&G’s 30%.

Edgewell makes 60% of its $2.4 billion in revenue from razors and shaving cream, and 34% from sun-care and feminine products. Infant products, like diaper disposal systems and bottles, account for the remainder.

This fiscal year, ending in September, analysts expect Edgewell to earn $219 million or $3.82 a share. Earnings could rise 9% to $4.15 per share, on 1% sales growth in fiscal 2018.

Edgewell is investing in its brands and developing new products, and that has led to market share gains. Management has guided for low single-digit organic sales growth in fiscal 2017. A focus on cost-cutting has also been key to its strategy, and could boost operating margins.

Unilever has long been thought of as a possible suitor for Edgewell. Now that the Kraft deal is off, Unilever will likely need to prove to its shareholders that it can create value on its own. That could create some urgency to do its own deal of some kind.

Ultimately, whether the buyer is Unilever or someone else, we wouldn’t be surprised to see Edgewell acquired in the next two years.

http://www.barrons.com/articles/edgewell-personal-care-cheap-buyout-candidate-1488366000

EDGEWELL PERSONAL CARE COMPANY (EPC)
Last Trade [tick] 75.6500[+]
Volume 582,199
Net Change 1.8100
Net Change % 2.45%