Rayovac's Amped Up

Rayovac (NYSE: ROV), may be the No. 3 battery manufacturer in the U.S., but it's No. 1 where it counts. In 2003, stocks of competitors Gillette (NYSE: G), maker of Duracell, and Energizer Holding (NSYE: ENR) were up 24% (including dividends) and 35%, respectfully. Rayovac scored a 57% gain.

Indeed, calling Rayovac "No. 3" is a bit misleading. Rayovac is No. 1 in rechargeable batteries in North America and Europe. Its Remington brand is No.1 in North America for foil electric razors. And hear this: Rayovac is No. 1 in hearing aid batteries.

When the company reported yesterday, management raised earnings guidance for 2004 to $1.70 to $1.75. At the low end, the stock trades at a forward price-to-earnings multiple of 15. That's reasonable for a large corporation growing revenue at 11%.

Rayovac is also aggressively reducing costs. Initiatives at Remington are expected to save $30 million-$35 million by year end 2005. VARTA (European batteries) is expected to contribute $45 million. This ability to boost margins and profitability while controlling costs is essential in fiercely competitive markets.

Rayovac is not without problems. A 71% year-over-year increase in total debt -- to $829 million -- was mostly fueled by the $322 million purchase of Remington (including assumed debt). That's a lot of debt when a great quarter's net income is $22.2 million.

And while operating margins increased sharply to 11% (in line with Energizer's), that pales to Gillette's 21.8% margins. The company needs to shave costs further and to energize growth before investors will see their way clearly around the mountain of debt.

Still, Rayovac's battery business is nicely poised for the long term. In January, the company purchased 85% of a battery company in China for $24 million -- and this investment, besides generating $35 million in revenue in 2004, will be accretive to earnings. That's a fairly modest sum to pay for a leading Chinese battery manufacturer.

Bottom line: Rayovac is poised for growth and its free cash flow is increasing. At 15 times forward earnings, it is no slam dunk but well worth a second look.

You can e-mail W.D. Crotty at HawaiiFool@hawaii.com. Join W.D. and other investors on discussion boards to talk about Rayovac and other consumer product companies. For a 30-day free trial, click here.