Edgewell Personal Care Co (EPC)

[Enterprising Investor]

Edgewell Personal Care Could Have 40% Upside (5/07/16)

The consumer-products company could be acquired at a hefty stock premium —or prosper on its own.

By David Englander

Ever since Edgewell Personal Care spun off Energizer Holdings in July 2015, the prospect of an outright sale of Edgewell has warmed investors’ hearts.

Edgewell (ticker: EPC), a maker of well-known brands in shaving, sun care, and feminine and infant care, has an attractive franchise. Its small size (market value: $4.7 billion) in an industry dominated by giants like Procter & Gamble (PG) and Unilever (UN) also makes it a scarce and digestible asset for a larger player to acquire.

Investors hoping for a quick sale have been disappointed so far. About a week ago, Edgewell announced that its chairman, Ward Klein, will retire in July, fueling concerns that the business might not fetch a buyer anytime soon.

That said, Edgewell remains appealing. The stock is down about 20% since the spinoff, and has done almost nothing since this column penned a positive piece last fall (“Edgewell Personal Care Shares Look Cheap,” Sept. 26). Yet, even without a buyout, the shares could rally about 10% in the next year, propelled by earnings growth. They were trading on Thursday at $78.50.

In a report published last week, Jefferies analyst Kevin Grundy wrote that Klein’s resignation “signals that a potential sale of the company is less likely in the near term.” Grundy, who characterizes Edgewell as a “willing seller,” revised his stock-price target to $87 from $95, putting a lower probability on a sale.

In a deal, Grundy says, the stock could fetch as much as 17 times this fiscal year’s estimated earnings before interest, taxes, depreciation, and amortization, or about $110 a share.

Historically, scarce consumer-products assets have sold for high multiples. In 2011, Unilever paid 14 times Ebitda for Alberto-Culver, a maker of hair and skin-care products. The prior year, Reckitt-Benckiser Group (RB.UK) bought SSL, the maker of Durex condoms, for 18 times Ebitda.

Edgewell’s brands include Schick, Skintimate, Edge, Playtex, Hawaiian Tropic, and Wet Ones. Many of its businesses are market leaders, with high profit margins and stable cash flows. In shaving, Edgewell is No. 2 globally behind P&G’s Gillette. In sunscreen, it is No. 1 in the U.S.

In fiscal 2015, which ended in September, Edgewell generated $2.4 billion in revenue. Shaving products contributed 60%; sunscreen and feminine products, 33%; and the rest from infant products such as bottles and diaper-disposal systems.

KLEIN, CEO OF ENERGIZER from 2005 to 2015, was largely responsible for building Edgewell’s personal-care lineup through acquisitions when the Chesterfield, Mo.–based company was part of Energizer. Klein was also instrumental in breaking up Energizer into two companies. Edgewell’s sister company, Energizer Holdings (ENR), operates the battery part of the old business.

Edgewell CEO David Hatfield will take over the chairman position. On the earnings call last week, an analyst asked Hatfield if Klein’s retirement made it more or less likely that the company would be sold. “There’s no change in that regard,” the CEO replied. “I’m committed to delivering value to shareholders.”

One big opportunity for a potential acquirer lies in the shaving business, which is underexposed to emerging markets. In Brazil, for instance, the second-largest razor-and-blade market behind the U.S., Schick’s presence is small. Gillette has a market share of more than 80%.

If a big global player like Unilever or Colgate-Palmolive (CL) were to acquire Edgewell, it could drive growth by bringing scale and geographic reach to the business. Companywide, emerging markets account for only about 20% of sales.

EDGEWELL SHARES AREN’T inexpensive at 12.5 times enterprise value to 2017 estimated Ebitda. But the possibility of a buyout probably will keep a floor under the stock. Analysts expect the company to earn $203 million, or $3.39 a share, this year, on $2.3 billion in revenue. In 2017, they look for 9% earnings growth on flat sales.

Revenue growth has been hard to come by in the past few years. Heavy competition and slowly growing markets have weighed on the business. Management has bumped up its investment in key brands with the highest return potential in a bid to turn things around.

The company also has been rationalizing its distribution network and cutting costs. Edgewell generates about 90% of its sales in 20 markets. In its smaller markets, the company is transitioning to outside distribution from in-house capabilities. That has reduced sales but also lowered expenses.

For the full year, Edgewell has guided Wall Street to expect little change in sales, excluding the impact of currencies. That takes into account a projected 1.5% hit from the change in distribution. Still, the strategy could drive earnings growth, which could ramp up in coming years. Analysts estimate that Edgewell could earn just over $4 a share in fiscal 2018.

Just because the potential for an acquisition exists doesn’t mean a deal will happen. The stock market is full of companies that could be bought, but aren’t. Yet in Edgewell’s case, patience might stand a good chance of being rewarded.

http://www.barrons.com/articles/edgewell-personal-care-could-have-40-upside-1462593836