Free-Reprint Article Written by: Geoff Gannon 
See Terms of Reprint Below.

* This email is being delivered directly to members of the group:

We have moved our TERMS OF REPRINT to the end of the article.
Be certain to read our TERMS OF REPRINT and honor our TERMS 
OF REPRINT when you use this article. Thank you.

This article has been distributed by:

Helpful Link: 
  The Digital Millennium Copyright Act - Overview


Article Title:
An Analysis of Energizer Holdings (ENR)

Article Description:
Energizer Holdings (ENR) owns two of the world's great brands: 
Energizer and Schick. Currently, about 70% of the company's sales 
come from the battery business and 30% come from the razor and 
blades business. International sales (from both businesses) 
account for almost exactly half of all sales.

Additional Article Information:
3550 Words; formatted to 65 Characters per Line
Distribution Date and Time: Fri Mar  3 00:01:30 EST 2006

Written By:     Geoff Gannon
Copyright:      2006
Contact Email:  mailto:[EMAIL PROTECTED]

Article URL: 

For more free-reprint articles by this Author, please visit:


An Analysis of Energizer Holdings (ENR)
Copyright © 2006 Geoff Gannon
Gannon On Investing

Energizer Holdings (ENR) owns two of the world's great brands: 
Energizer and Schick. Currently, about 70% of the company's sales 
come from the battery business and 30% come from the razor and 
blades business. International sales (from both businesses) 
account for almost exactly half of all sales.

Energizer's acquisition of Schick was a steal. In 2003, the 
company bought Schick – Wilkinson Sword from Pfizer (PFE) for 
just under $1 billion. In 2005, Schick contributed just under 
$120 million in profit. This figure does not properly allocate 
certain shared costs to Schick; but, it does include depreciation 
expense in excess of maintenance cap ex. Therefore, I believe 
$125 million is a good estimate of the true economic benefit 
provided by Schick in 2005. Over the next few years, further 
margin improvements are likely at Schick; because, between 
product launches, fewer razors and more blades will be sold. 
Energizer's cost of capital for the Schick acquisition was very 
low. Most of the purchase price has been refinanced as fixed debt 
carrying an interest rate of less than 5%.

Over the next thirty years, Energizer will become primarily a 
razor business and primarily an international business. When 
looking at Energizer today, this fact is difficult to see; 
however, it is an important truth. Here, I disagree with many 
other commentators on Energizer's business. They are far more 
optimistic about the battery business and far more pessimistic 
about the razor blade business than I am. We both have access to 
the same information, so why the disagreement?

I believe Energizer's highly profitable battery business will 
slowly wither away. It will remain in some form. Even decades 
from now, there will still be Energizer batteries sold all over 
the world. But, how many will be alkaline batteries?

A lot of analysts note that Energizer is particularly well 
positioned in the markets for lithium and rechargeable batteries, 
and therefore believe a transition to such batteries would not 
necessarily spell doom for the little pink bunny. Energizer's 
sales of these products has recently been growing at a 20% clip. 
With so many personal entertainment devices finding their way 
into consumers' hands (and under their Christmas tress), it looks 
like Energizer has a wonderful growth opportunity to exploit.

Unfortunately, that's not how I see it. Energizer will look to 
grow its sales of lithium batteries – as it should. But, don't 
let the flashy growth fool you. There are two parts to the value 
equation: growth and profitability.

In the long run, lithium batteries are unlikely to be anywhere 
near as profitable as alkaline batteries. They are more durable 
and less visible. This is a deadly combination for the likes of 
Energizer and Duracell. A battery that is bought by the 
manufacturer rather than the consumer is not something these 
companies look forward to. There is very little price competition 
in alkaline batteries. Energizer's brand name and its 
distribution system is the key to its ability to charge high 
prices on alkaline batteries. Those advantages are mitigated in 
the market for lithium batteries.

Alkaline batteries won't be going the way of the Dodo anytime 
soon. It's important to note alkaline battery sales have not yet 
decreased by volume. This is as true in the U.S. as it is 
overseas. In fact, unit sales of alkaline batteries have 
consistently increased over the past few years.

This fact has been obscured by changes in the retail business. 
More and more customers are buying batteries in bulk. Some 
analysts have expressed concern.  They believe this means brand 
loyalty is eroding. Despite being generally pessimistic about the 
battery business, I disagree with that sentiment.

Brand loyalty is not eroding. More people are shopping at 
retailers that sell in bulk. Therefore, more people are buying 
larger packages of batteries. There is no evidence to suggest 
there is a trend toward cheaper, less prominent brands. In fact, 
there is no real evidence to support the idea that consumers 
actually want larger packages of batteries.

It's clear they want to shop at the stores that sell larger 
packages of batteries, but that isn't necessarily the same thing. 
Most consumers would be happy to buy batteries in smaller 
packages. That's exactly what they'd be doing, if they weren't 
shopping at superstores and the like. Consumers have not suddenly 
taken to buying their batteries via in – depth comparison 
shopping. Falling unit prices in the battery business have been 
caused by changes in retail methods, not changes in consumer 

The strength of the major brands was evidenced last year when 
Energizer raised battery prices and Duracell followed suit. For 
the most part, Energizer has not been hurt by rising materials 
costs, because it has simply raised prices. Many investors 
haven't really noticed the rise in materials costs, because these 
costs haven't affected Energizer's bottom line. Energizer's 
pricing power has made this blissful ignorance possible. True, 
Energizer's battery business doesn't have as much pricing power 
as its razor business; however, it still has far more pricing 
power than the vast majority of American businesses.

Energizer's battery business will produce a ton of free cash flow 
for years to come. The company will likely remain in the battery 
business even after alkaline batteries account for a much smaller 
part of the market. As a result, the profitability of Energizer's 
battery business will decline.

This won't happen today or tomorrow. There are still tons of 
products that are far too cheap to take more expensive, more 
durable batteries. There are also opportunities for Energizer to 
gain market share in developing countries (who will likely be 
moving away from super cheap carbon zinc batteries). The combined 
distribution infrastructure of Energizer and Schick will help 
both businesses gain market share overseas. But, there is far 
less opportunity for growth in the battery business than there is 
in the razor business.

An investor should value Energizer Holdings' battery component as 
a no growth business. This isn't quite as bad as it sounds. First 
of all, the battery business is not truly a no growth business. 
Both unit sales and dollar sales have increased in the recent 
past. Whatever growth does occur will add value to Energizer, 
because the battery business will continue to earn a very good 
return on incremental capital.

Unfortunately, the trend of rising unit sales of alkaline 
batteries will not last forever. Some alkaline batteries will be 
replaced by rechargeable and lithium batteries. Energizer will be 
hurt by such replacements. Even if the company does establish a 
strong position in the lithium battery market, its pricing power 
will be far less than it is in alkaline batteries.

It is important to note that the total volume sales of batteries, 
taken in the aggregate, will still grow. Although some 
rechargeable and lithium batteries will replace alkaline 
batteries, other rechargeable and lithium batteries will be used 
in completely new products.

Even thirty years from now, it is hard to imagine a world with 
lower unit sales of batteries than the levels of 2005. However, 
it is the mix of those batteries sales that will ultimately 
determine Energizer's profitability. I am far less optimistic 
than most about the profitability of that mix.

There is a very real risk that selling lithium batteries will 
prove to be an inherently less profitable business. Most analysts 
have not yet addressed this issue. I can not say whether their 
silence on this matter is caused by a lack of concern or by a 
lack of interest. Regardless, I believe such silence is 
dangerous, because the future profitability of the battery 
business is an important part of any valuation of Energizer 

Increased durability and reduced visibility generally lead to 
lower brand awareness, less customer stickiness, and greater 
price competition. Therefore, the economics of the alkaline 
battery business and the lithium battery business are not as 
similar as they first appear to be. It may be sometime before the 
economics of the lithium battery business become clear.

In the mean time, investors would be best advised to view any 
migration from alkaline batteries to lithium batteries as a net 
negative for Energizer Holdings. Shareholders will want to follow 
this trend closely; however, it may be several years before a 
full understanding of the economics of the nascent lithium 
battery business is possible.

Energizer's future growth will come from its razor business – 
especially international sales of its Schick products. In the 
recent past, the razor and blade business hasn't experienced 
tremendous growth. This has lead analysts and investors to 
overlook the great long term growth potential in this business. 
Schick is a very strong international brand supported by 
Energizer's already established worldwide distribution 

Over the next thirty years, the worldwide razor business will 
become even less fragmented. Gillette and Schick will make large 
gains in their share of total unit volume, and even larger gains 
in their share of total sales dollars. Their brands already have 
worldwide reach. In the long run, far greater penetration is 
inevitable. There are no other similarly positioned competitors. 
No one will be able to compete with their distribution 
infrastructure, their R&D, and their advertising.

The razor business will be dominated by near continuous new 
product launches for a very long time to come. Don't be fooled by 
those who downplay any increase in sales at Energizer or Gillette 
that is the result of a new product launch. Getting consumers to 
trade up for pricier models will be the real engine of growth in 
the razor business.

I believe it is a sustainable business model. Long term economic 
and demographic trends are favorable to such a model. As segments 
of overseas populations become more prosperous, increased 
spending on pricey, branded consumer products is sure to follow.

The two major competitors' brands and their new products have a 
strong hold over men. It is likely their grip will only tighten. 
For a man, there is an important psychology attachment to his 
razor. A man's experience with his razor is regular and 
ritualistic. He also uses very few other personal care products 
of any consequence. Therefore, he is likely to develop the kind 
of relationship with his trusted razor that will make him a super 
sticky customer.

This psychological attachment to a razor is not as strong for 
women. However, both Schick and Gillette are working to increase 
customer stickiness among women. So far, their efforts seem to be 
fairly productive. If successful, high end razor sales to women 
will provide an even greater source of growth for both 
businesses, because they are coming off a much lower base.

Societal trends in much of the world will also favor high growth 
among sales to women for this sort of pricey, branded personal 
care product. As a result, the strong international brands of 
these two razor companies should become even more valuable in the 
years to come – and those brands can not be replicated.

Schick is a true franchise. This fact often goes unnoticed, 
because Schick's market share is dwarfed by Gillette's. Both 
companies will grow their share of the international market, but 
Schick may very well grow its share more rapidly. There is 
nothing particularly surprising about this. Schick is starting 
from a smaller base, and is, in many ways comparable to Gillette.

What real advantages does Gillette have over Schick?

True, Gillette has a greater market share, but where is the 
actionable advantage in that? Can't Schick achieve similar 
economies of scale at each of its production facilities? Doesn't 
Schick posses a similar distribution system (largely provided by 
Energizer)? Doesn't Schick have at least some brand recognition 
in most of the same countries as Gillette? Won't Schick be able 
to match Gillette's spending in both promotion and innovation?

Simply put, what can Gillette do that Schick can't? Or, what can 
Gillette do better or more cheaply than Schick can?

One could argue Gillette's absorption by Proctor & Gamble (PG) 
gives it some superiority in distribution, advertising, and R&D. 
But, whatever advantages exist in these areas are slim. There is 
no evidence Gillette has an advantage in new product development 
over Schick. True, no one can match Proctor & Gamble's 
distribution system or its economies in advertising; but, 
Energizer comes awfully close. The combined Energizer Holdings 
has great enough resources to make Gillette's advantages in these 
areas little more than academic. Once a company enjoys these 
advantages on the scale of an Energizer or Gillette, what real 
difference do they make?

Gillette's competitive advantages over Schick are greatly 
exaggerated. Schick will not wrest control of the razor market 
from Gillette. But, that isn't the important question. The 
important question is this: will Schick grow its international 
business profitably for many years to come? The answer to that 
question is an emphatic yes.

In fact, while I concede the fact that Gillette is a tough 
competitor and a first rate business, I believe the probabilities 
favor faster long term growth at Schick than at Gillette. The 
combination of the razor business and the battery business makes 
sense. Schick will continue to benefit from this combination.

More importantly, being the second player in a business like 
razors isn't a bad racket. Look at the records of other companies 
who found themselves in the same situation. An investor would be 
just as foolish to dismiss an investment in Energizer on account 
of Gillette's dominant position in the razor business as he would 
have been to dismiss an investment in Pepsi (PEP) on account of 
Coke's (KO) dominant position in the cola business. As an 
investor, you aren't looking for the biggest business – you're 
looking for the best bargain.

Energizer's management is shrewd and shareholder oriented. I have 
to refute the claims I have heard (reported in several places) 
that Energizer's management has been anything less than superb in 
its stewardship of the owners' capital. There are several 
complaints; none of them have any merit.

The most frequent complaint is that Energizer doesn't hold 
quarterly conference calls. Good for them. If you're part owner 
in a battery and razor blade business in which a quarterly 
conference call is necessary, you're in the wrong battery and 
razor blade business. Energizer's disclosures are absolutely 
first rate. Management just chooses to make those disclosures on 
paper. Anyway, the conference call is really more of an issue for 
analysts than it is for shareholders – and Energizer has no 
obligation to pander to analysts.

The company's annual report is a good model for others to 
emulate. It reports comprehensive income within the income 
statement, instead of opting for a separate disclosure. This 
should be standard practice. Several footnotes in the report lead 
to tables instead of long lists of numbers in tiny print. This 
should be a standard reporting practice as well.

Energizer breaks its business down into three common sense 
business segments: North American Battery, International Battery, 
and Razors and Blades. It reports all items for these segments in 
the body of the report. This means cash flow and balance sheet 
items are provided right next to income items. That allows anyone 
with third grade math skills to calculate returns for each 
business segment and to judge each unit on its cash flows instead 
of relying solely on the income statement.

Within the body of the report, the company breaks down sales 
across all business segments by geography. This means, with just 
a little subtraction, one can break each unit (batteries and 
razors) down into North American and International sales. Battery 
sales are also divided into three common sense product 
categories: alkaline batteries, carbon zinc batteries, and other 
batteries. This is another really useful disclosure.

The company even volunteers exact estimates on event – driven 
sales of batteries (e.g., hurricanes) and benefits from the 
timing of production at certain plants. In both cases, the 
information is provided so the reader can lower his estimate of 
normalized earnings, not raise it.

Very few companies will prominently mention how an unusual number 
of hurricanes helped them, or how the same volume of output in 
the next calendar year would not result in equally high earnings. 
Energizer volunteers both pieces of information without resorting 
to the use of footnotes.

The one crucial fact that isn't explicitly provided is the sales 
mix between razors and blades within Schick. That would be a nice 
touch. Energizer isn't alone in not providing this breakdown. 
Most public companies in refill/repair businesses don't provide 
this particular detail, despite its great economic importance.

If you want to see evidence of the misunderstandings that can 
result from this lack of disclosure, look no farther than the 
market's reaction to Lexmark's (LXK) recent announcement that its 
earnings were better, because its printer sales were worse.

Energizer's share repurchases enhanced shareholder value. A lot 
of analysts would rather see a dividend. They're wrong. Once a 
company starts paying a dividend, it effectively promises to keep 
doing so. On Wall Street, cutting a dividend is viewed as a 
mortal sin. Healthy companies just don't do it. Even unhealthy 
companies go to ridiculous lengths to maintain regular dividend 
payments (e.g., GM). By not paying a dividend, Energizer 
maintains its flexibility. It can make an acquisition, it can 
buyback stock, or it can pay down debt. In this way, the company 
is able to put its capital to the best possible use.

To date, that's exactly what it has done. All share repurchases 
were made at discounts to intrinsic value. The acquisition of 
Schick is a rare example of a large corporate acquisition that 
was well worth the price. In both cases, the money borrowed was 

Of course, it remains to be seen if Energizer will continue to 
put its capital to the best possible use, or whether low interest 
rates and a low stock price were just happy coincidences and 
Energizer will continue to borrow heavily and buy back stock 
regardless of its cost of capital and the stock's discount to 
intrinsic value. Past actions and statements from management lead 
me to believe Energizer will continue to allocate capital wisely 
– but, one can never be sure of management's intentions.

Energizer has proven to be more shareholder oriented than most 
companies, not less. So, ignore the occasional uneducated 
complaints made about Energizer's corporate governance. 
Energizer's actions prove the company's commitment to enhancing 
shareholder value. Those actions back up the words with which the 
annual report begins:

"Going forward, we are focused on two clearly defined financial 
objectives – to generate consistent annual earnings per share 
growth and to maximize free cash flow. We fully intend to achieve 
those objectives by successfully executing our ongoing business 
strategies – investing in our brands for future growth, using 
cash flow to acquire operating earnings and opportunistically 
repurchasing our shares."

While I believe Energizer is a suitable investment on qualitative 
grounds, every investment decision ultimately comes down to 
price. At a steep discount to its intrinsic value, Energizer 
Holdings would make an excellent long term holding. So, what is 
its intrinsic value?

Energizer is worth at least $7.5 billion. The company's current 
enterprise value is about $5 billion. So, at today's price, the 
margin of safety is not much greater than 33%. I consider this to 
be an insufficient margin of safety. As an individual investor, 
not restricted by having a large amount of money to invest, there 
is no reason to accept a margin of safety of less than 50%, if 
you are willing to hold a concentrated portfolio. Of course, if 
you want to be widely diversified across 30 or more stocks at all 
times, you will often have to accept a margin of safety of less 
than 50%. For such widely diversified investors, Energizer 
provides an attractive investment opportunity at the current 

Of course, estimates of intrinsic value will differ from person 
to person. That's normal. In this case, the two key (and 
potentially controversial) assumptions are the decline of the 
battery business and the growth of the razor business.

To give you some idea of the importance of these assumptions, I 
came up with an estimate based on the worst case scenario of a 
relatively rapid decline in the battery business as well as an 
estimate based on the best case scenario of strong, sustained 
growth in the razor business. The worst case scenario yielded an 
intrinsic value of $5.25 billion; the best case scenario yielded 
an intrinsic value of $12 billion. Both of these estimates are 
within the realm of possibility. In neither case did I make any 
obviously unreasonable assumptions.

For instance, a very rapid decline in the battery business would 
yield a much lower intrinsic value than $5.25 billion. However, I 
do not believe such a rapid decline is a reasonable assumption.

On the other side of the scales, very strong growth in the razor 
business would yield an intrinsic value much higher than $12 
billion. I believe such growth is unlikely, unless there is some 
catalyst I am unaware of. If you believe there will be sustained, 
strong growth in the demand for high priced razors among large 
populations overseas, $12 billion becomes a low end estimate. 
Personally, I believe $12 billion is very much a high end 

I always try to err on the side of caution. So, I'm sticking with 
$7.5 billion as my best conservative intrinsic value estimate for 
Energizer Holdings.

Geoff Gannon is a full time investment writer. He writes 
a (print) quarterly investment newsletter and a daily value 
investing blog. He also produces a twice weekly (half hour) 
value investing podcast at:



TERMS OF REPRINT - Publication Rules 
(Last Updated:  April 7, 2005)

Our TERMS OF REPRINT are fully enforcable under the terms of:

  The Digital Millennium Copyright Act


*** Digital Reprint Rights ***

* If you publish this article in a website/forum/blog, 
  You Must Set All URL's or Mailto Addresses in the body 
  of the article AND in the Author's Resource Box as
  Hyperlinks (clickable links).

* Links must remain in the form that we published them.
  Clean links should point to the Author's links without
  redirects having been inserted into the copy.

* You are not allowed to Change or Delete any Words or 
  Links in the Article or Resource Box. Paragraph breaks 
  must be retained with articles. You can change where
  the paragraph breaks fall, but you cannot eliminate all
  paragraph breaks as some have chosen to do.

* Email Distribution of this article Must be done through
  Opt-in Email Only. No Unsolicited Commercial Email.

* You Are Allowed to format the layout of the article for 
  proper display of the article in your website or in your 
  ezine, so long as you can maintain the author's interests 
  within the article.

*** Author Notification ***

  We ask that you notify the author of publication of his
  or her work. Geoff Gannon can be reached at:

*** Print Publication Reprint Rights ***

  If you desire to publish this article in a PRINT 
  publication, you must contact the author directly 
  for Print Permission at:  


If you need help converting this text article for proper 
hyperlinked placement in your webpage, please use this 
free tool:


ABOUT THIS ARTICLE SUBMISSION is a paid article distribution 
service. and 
are owned and operated by Bill Platt of Enid, Oklahoma USA.

The content of this article is solely the property 
and opinion of its author, Geoff Gannon



1. Print the article in its entirety. Don't make any changes in the article . 
2. Print the resource box with all articles in their entirety.
3. Send the Author a copy of the reprinted article or the URL 
  where the articles was posted.

Anything short of following these three rules is a violation 
of the Authors Copyright. 
Yahoo! Groups Links

<*> To visit your group on the web, go to:

<*> To unsubscribe from this group, send an email to:

<*> Your use of Yahoo! Groups is subject to:

Reply via email to