Edgewell Personal Care Co (EPC)

[Enterprising Investor]

Edgewell Personal Care Could Attract Buyer With Deep Pockets (4/29/17)

The consumer-products company looks like a bargain. Its Schick shaving business has room to grow.

By David Englander

Procter & Gamble’s move to cut prices on some razors in its Gillette business has put pressure on shares of smaller rival Edgewell Personal Care, the owner of Schick.

Edgewell’s stock (ticker: EPC) has dropped more than 10% since P&G (PG) announced the price cuts in February. They took effect about a month ago, and apply to Gillette’s men’s razors and blades in the U.S.

Schick competes directly with Gillette in the shaving aisle, and investors fear that lower prices could hurt Schick’s sales. P&G is the global market leader in shaving products, and Edgewell is No. 2. Based in St. Louis, Edgewell will report fiscal second-quarter earnings on Tuesday.

While the news isn’t good for Edgewell, the selloff in its stock looks like an opportunity. At a recent $71.63, the shares trade for an enterprise value of 12 times 2017 earnings before interest, taxes, depreciation, and amortization. That appears inexpensive for such a high-quality franchise.

Edgewell is bite-size in a market dominated by giants such as P&G and Unilever (UL). Its Schick division, in particular, is a unique, scarce asset. Its other brands include Skintimate, Edge, Playtex, and Hawaiian Tropic.

Growth has stalled at consumer-products companies, but that could work in Edgewell’s favor and make it an enticing acquisition target for a larger player. Historically, scarce consumer-products assets have sold for high multiples of Ebitda.

Still, skepticism runs high on Wall Street. Of the 15 analysts who cover Edgewell, only three are bullish. One bull, RBC Capital Markets analyst Nik Modi noted in a February report that Edgewell could be acquired for 17 times Ebitda. On this year’s analyst estimates, that works out to about $110 a share. Colgate-Palmolive (CL) and Unilever, among others, have long been thought of as potential suitors.

Edgewell is a product of Energizer Holdings ’ (ENR) breakup in July 2015, when the battery business, now known as Energizer Holdings, split from the personal-products division. Edgewell’s shares have fallen nearly 30% since the breakup, as the initial excitement over a potential takeout has waned.

In the fiscal year ending in September, Edgewell could earn $215 million, or $3.77 a share, on $2.4 billion in revenue. In fiscal 2018, analysts look for an 8% increase in earnings per share, on 1% revenue growth.

P&G’s price cuts reflect recent changes in the shaving-products business. For years, Gillette was able to capitalize on its market share and raise prices. Its wide moat was attractive to Warren Buffett, whose Berkshire Hathaway (BRK.A) was a large shareholder before Gillette was sold to P&G in 2005.

In the past few years, P&G has been losing market share in men’s razors. Competitive pressures have been intense, as online shaving upstarts such as Dollar Shave Club and Harry’s have sprung up, offering a lower-priced product.

Yet the impact of the price cuts on Edgewell might not be so great. RBC’s Modi wrote in his February report that P&G’s razors and blades sell for a 25% premium to those of Edgewell. P&G also tends to be more promotional than Edgewell; in some cases, promotional prices are lower than the announced average 12% cut to the list price.

Modi estimates that only 15% of Edgewell’s sales have exposure to P&G’s price cuts.

For the December quarter, Edgewell reported market-share gains in its North American shaving business, which includes men’s and women’s products. Organic sales in the region rose 3.8% compared with a year ago. Internationally, the business was weaker. Overall, company sales declined 2% in the quarter.

Cost-cutting is on Edgewell’s agenda. The company could take out more than $100 million in costs in the next few years. That could be a driver of gains in earnings per share, even with tepid revenue growth.

Edgewell’s shaving business is underexposed to emerging markets, a big plus for a potential acquirer with scale in those regions. If the stock stays around recent levels or trades lower, a suitor could emerge sooner rather than later.

THIS COLUMN HAS WRITTEN positively about PICO Holdings (PICO) on a number of occasions in the past few years. PICO is a tiny conglomerate whose main assets are water rights in the Southwest and a 57% stake in home builder UCP (UCP). We last weighed in on the stock in early March, when the shares were trading for about $13.50.

They have shot up almost 20% since, to a recent $16.30. In April, UCP struck a deal to merge with home builder Century Communities (CCS) for $5.32 a share in cash and additional stock. Based on the recent price of Century’s shares, the deal is worth more than $11.50 a share.

It looks like a good one for PICO. It brings a sizable amount of cash in the door, and puts the focus of PICO’s business of monetizing its water rights. One holder, Kelly Cardwell of Central Square Management, estimates PICO’s net asset value at $21 to $27 a share.

The next move up for the stock could come if PICO were to sell any of its water rights. Cardwell notes that stock buybacks also could sharply lift his estimate for net asset value per share. With the cash coming in from the UCP deal, PICO shares could have plenty of upside ahead.

http://www.barrons.com/articles/edgewell-personal-care-could-attract-buyer-with-deep-pockets-1493438708