Energizer Expected to Benefit From Growing Lithium Batteries Market

We are upgrading Energizer Holdings, Inc. (ENR) to Neutral from our previous Underperform rating, indicating that it will continue to perform in line with the market. The target price of $66.00 is based on a P/E multiple of 12.5X our 2010 EPS estimate.

Energizer Holdings’ first quarter earnings beat the Zacks Consensus Estimate on higher sales of batteries and razors and increased cost cutting. We also remain upbeat about ENR’s personal care division. The feminine and infant care businesses are still struggling, as both Johnson & Johnson (JNJ) and Gerber Scientific Inc. (GRB) play a significant role in the infant care segment.

We believe that the results for Energizer are improving due to higher sales of new batteries and razors. Currently, the fastest growing area for Energizer is its lithium battery business (sales expected to grow at a 5-year CAGR of 29.8%). As only a few companies specialize in manufacturing lithium batteries, Energizer is expected to benefit from the growing market.

Also, Energizer has recently announced that its new Schick Hydro razor will be launched in April 2010. The Hydro comes in three and five-blade varieties. Schick also plans to begin selling a line of Hydro-branded shaving gel.

Although pricing remains uncertain, the three-blade razor is less expensive than the company's Quattro brand, while the five-blade razor is Schick's highest-end shaver and would cost more than Schick's existing Quattro. Energizer has invested more than five years of research and spent more than $150 million on these products.

The company focuses on product innovation and continued implementation of productivity programs. The company is committed to accelerating growth and gaining market share based on innovative new product launches across all categories. The new products launched drove 7% growth in fiscal 2009. We believe revenue growth will come from new products. However, competition remains a concern.

Energizer's new Schick Hydro razor may face increased competition from Gillette, a unit of Procter & Gamble Co. (PG), which is expected to launch its own new razor Fusion ProGlide in June 2010 for $10.99.

The company stands to benefit from acquisitions, restructuring initiatives, product innovations, strong cash flow and increased debt repayment. We remain positive on the company’s robust cash flow from operations, which increased by $73.3 million from the previous quarter to $97.3 million in the first quarter of 2010. The prudent use of the company’s cash flow has allowed management to return value to shareholders through share repurchases.

However, weaker margins, a delay in stock buybacks, intense competition and increased marketing spending are potential negatives.

While Energizer is seeing some stabilization in its battery business, the company has provided a cautious guidance for its battery business in 2010 due to intense competition, weak demand and weak prices. ENR remains cautious regarding the battery category, as consumption remains sluggish and the effect of device trends in the battery category remains difficult to assess due to the economic downturn.

We believe the company’s new product launches and increased consumer spending this year could provide some upside to the stock. We therefore have a Neutral rating on the stock.