Will Energizer Keep Going, Going, Going After It Is Spun Off?

Source: Wikimedia Commons

For investors who own shares of Energizer Holdings (NYSE: ENR  ) , April 30 was probably a pretty good day. After management announced that it would be separating its Personal Care and Household Products operations into two stand-alone companies, shares of the Energizer Bunny giant soared 14% to close at $111.69. While it's true that all of the easy money is probably off the table, is it possible that the business still has room to run or is now the time to hop out? To figure this out, it would be wise to compare the company to rival Procter & Gamble (NYSE: PG  ) .

Energizer has lost some energy
Over the past three years, Energizer's results have been mixed. Between 2011 and 2013, the company saw its revenue fall 4% from $4.65 billion to $4.47 billion. In addition to being slowed down by its Personal Care segment, whose revenue hasn't budged even an inch over this timeframe, the real pain in management's back has been Energizer's Household Products segment.

During this three-year period, the company's Household Products segment saw revenue fall a whopping 8% from $2.20 billion to $2.02 billion. The main culprit, according to the company's most recent annual report, has been lower battery sales. However, despite these problems, the margins of these segments have done pretty well.

  Personal Care Segment Profit Margin Personal Care Forecasted Net Profit Margin Household Products Segment Profit Margin Household Products Net Profit Margin
2013 19.4% 8.6% 21.8% 9.7%
2012 19% 8.9% 19.2% 9%
2011 16.7% 5.3% 18.7% 6%

Source: Energizer

As we can see in the table above, the segment profit of each part of the business, which is a proxy for the operating income of each segment without factoring in shared costs, have done really well. Between 2011 and 2013, Energizer's Personal Care segment saw its segment profit margin rise from 16.7% of sales to 19.4%.

Assuming that shared costs could be allocated in proportion to the company's segment profit percentage, then the business saw its net profit margin in this segment rise from 5.3% to 8.6%. Meanwhile, Energizer's Household Products segment saw its segment profit margin increase from 18.7% to 21.8% and its net profit margin jump from 6% to 9.7%.

But what does Energizer look like when placed next to Procter & Gamble?
There's no denying that Procter and Gamble is a far larger business than Energizer, but the nature of the company's operations make it as close to a perfect comparable for Energizer's Personal Care segment as you can get.

Source: Wikimedia Commons

From a revenue perspective, Procter & Gamble did reasonably well for itself recently, as evidenced by the company's revenue, which increased 4% from $81.1 billion in 2011 to $84.2 billion in 2013. Despite this though, the company's net income actually shrank 4% as higher costs and a $308 million impairment negatively affected the business's bottom line. Even in spite of this decline, however, the company's net profit margin came out to 13%, far higher than the estimated profits generated by Energizer's Personal Care segment.

Using these metrics from Procter & Gamble, the Foolish investor can determine that the company's P/E ratio of 21.4 is probably a good ceiling for assessing the worth of Energizer's Personal Care segment. This would place a value on the segment at no more than $4.5 billion, or $72.14 per share, leaving Mr. Market valuing Energizer's Household Products segment at $2.5 billion, or $39.55 per share.

Utilizing the same assumptions we did earlier, this would imply that investors are paying what they would pay for Procter & Gamble (which is probably too generous) to acquire the company's Personal Care segment and getting Energizer's Household Products operations for 13 times earnings. Making the company's P/E ratio in proportion to its net profit margin in relation to Procter & Gamble's, the cost of Energizer's Household Products segment would be a little more expensive at 20 times earnings.

Foolish takeaway
Despite its problems in recent years, Energizer has been an increasingly profitable enterprise. For this reason, combined with the fact that having two independent companies will create more opportunities for autonomous growth, there's a certain appeal to owning a stake in the business. However, even considering a modest P/E ratio for the company's Personal Care segment, the cost of its Household Products segment is befitting of a growth company, not a consumer staple struggling to grow. This might be a sign that the Foolish investor could find more compelling value elsewhere.

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