When Energizer Holdings, Inc. (NYSE:ENR) introduced its intention to amass the battery enterprise of Spectrum Manufacturers (SPB) in 2018, the corporate was setting as much as create a battery large. Larger market energy and prices synergies ought to in idea create a stronger enterprise, but lack of progress and a 5 occasions leverage ratio created actual causes to be involved as properly.

Quick forwarding 5 years in time, it’s evident that stagnation is the secret right here, making me very cautious to become involved, regardless of the optics of a low adjusted earnings a number of.

Some Perspective

Early in 2018, Energizer introduced a $2.0 billion money deal to amass Spectrum’s battery and moveable lighting enterprise, together with manufacturers like Varta and Rayovac. Typical merchandise included alkaline, carbon zinc and rechargeable batteries. The deal got here amidst arguably honest valuation multiples, contributing $866 million in gross sales and $169 million in adjusted EBITDA, for a close to 12 occasions EBITDA a number of.

The corporate believed that prices synergies, to the tune of $80-$100 million, had been achievable, making the multiples look much more compelling.

This was a sizeable deal, because the personal firm generated about $1.7 billion in gross sales on the time, creating a professional forma enterprise producing over $2.5 billion in gross sales, and being solidly worthwhile.

With 62 million shares buying and selling at $51 forward of the deal announcement, which took a very long time to shut for regulatory causes, the corporate commanded a $3.2 billion fairness valuation, and $3.9 billion enterprise valuation forward of the take care of Spectrum Manufacturers. Shares truly jumped on the announcement, at the same time as professional forma EBITDA of $650 million resulted in a leverage ratio of about 5 occasions. Leverage issues had been outdone by potential for earnings to rise in direction of $5 per share, upon the conclusion of synergies.

Turning South

Quick forwarding between 2018 and the autumn of final yr, we see that Energizer grew its 2023 gross sales to $2.96 billion, comfortably above the professional forma implications on the time of the deal announcement in 2018. Within the meantime, the corporate moreover introduced one other take care of Spectrum Manufacturers, buying the worldwide auto care enterprise in a $1.25 billion deal.

That mentioned, 2023 gross sales had been down 3% to $2.96 billion, as GAAP earnings had been reported at $140 million, equal to $1.94 per share, because the comparability to the GAAP numbers in 2022 will not be significant as that yr was impacted by an enormous amortization cost. On an adjusted foundation, the corporate posted earnings of $3.09 per share, up a penny from the yr earlier than, with the hole between GAAP earnings largely as a result of restructuring prices, in addition to the settlement loss on pensions.

Adjusted EBITDA was reported at $597 million, truly beneath the professional forma numbers seen in 2018, as the corporate has seen continued margin strain over time. Internet debt was reported at $3.1 billion and has probably not come down in any respect, principally amidst modest share buybacks, however furthermore substantial dividends being paid out.

Furthermore, there isn’t a fast avail in sight. 2024 gross sales are seen between flattish at finest, to down by low single digits. Regardless of the anticipated fall in gross sales, the corporate sees EBITDA enhance in a modest vogue to $600-$620 million, pushed by price financial savings, as the corporate sees adjusted earnings between $3.10 and $3.30 per share.

One other Shortfall

Alongside the discharge of the complete yr 2024 outlook, the corporate indicated that first quarter gross sales for 2024 are seen down 6-8% on an natural foundation, with adjusted earnings seen at simply $0.50-$0.60 per share.

In February, Energizer posted first quarter outcomes for the fiscal yr 2024. Reported gross sales had been down 6.3% to $716 million and alter, with natural gross sales declines seen in extra of seven%. This had a detrimental influence on the underside line, with GAAP earnings of practically $2 million translating into earnings of mere 3 pennies. The corporate posted adjusted earnings of $0.59 per share, principally referring to restructuring modifications and costs associated to the Argentina financial reforms.

The corporate reiterated the complete yr steering, as the corporate is stepping up its price financial savings targets. That is desperately wanted as web debt of $3.1 billion is secure, nonetheless leading to an over 5 occasions leverage ratio. This is available in half as the corporate retains paying out dividends at a charge of $0.30 per share, for a present dividend yield in extra of 4% at $28 per share.

And Now?

Buying and selling at simply 9 occasions earnings, Energizer appears to be like very low cost, however there are some actual caveats to this assertion. For starters, is the truth that natural progress is destructive, as an increasing number of units are chargeable themselves. Moreover, the earnings multiples are primarily based on adjusted earnings, with plenty of prices being excluded for, together with recurring bills like restructuring prices, usually involving money outflows as properly.

The opposite is the capital construction, as web debt (at nominal phrases) exceeds the market worth by a billion {dollars}, because the leverage overhang is essential and actual, as the corporate has made no inroads because the offers of 2018. Luckily, the debt load is for the overwhelming majority fastened by way of charges, with no main maturities due earlier than 2027, and blended charges seen beneath 5%. There’s one other destructive information occasion, as Energizer is dealing with a category motion lawsuit, because it allegedly stored battery costs excessive.

Amidst all this, my sentiment for Energizer Holdings, Inc. stays very poor, as shopping for an affordable adjusted earnings a number of sufficient will not be sufficient, as earnings are very adjusted, progress will not be seen and the leverage overhang is obvious. Amidst all this, ENR shares don’t look very costly, however cheapness in isolation hardly is a good argument to purchase the dip.