With the market currently selling at 18 times earnings, it appears that you could buy a piece of either of these companies at a somewhat favorable price, what with Kellogg trading at 13.4 times earnings and Energizer at 16.1 times earnings. Let's take a look deeper at both of these companies and find out if they warrant an investment.
Before digging into the numbers let's take a look at what each company does and how it makes money. Kellogg is a company you are probably familiar with, especially if you've ever eaten its Kellogg brand cereal. It also sells products to supermarkets under many other brand names, including Cheez-It, Pringles, and Keebler. Energizer is another company you are probably familiar with because of its battery brand. However, it too has a diversified stable of products under brands such as Edge, Schick, Hawaiian Tropic, Playtex, and more.
I suspect that part of the reason these companies trade below the market is their somewhat slow growth in comparison with some other hot companies.
Over the last ten years Kellogg and Energizer have grown their top lines by an average of 4.4% and 4.7% per year, respectively. Obviously, neither of these figures are eye-popping, but what is nice to see looking at these two companies is their consistency. Over the last ten years, the largest decline in year-over-year revenue for Kellogg was -1.93% and the largest increase was 8.88%. Using the same measure for Energizer, the largest decline was -7.64% and the largest increase was 28.71%. Energizer's results varied in a much wider range, but with the exclusions of those two outliers the range over the last ten years stands at -2.21% to 9.37%, which is quite a bit narrower.
Looking at earnings per share we see much rosier figures, helped by each company giving back to shareholders by repurchasing shares over the last ten years. Kellogg has grown its earnings per share by an average of 8.7% per year over the last ten years, and Energizer showed growth of 7.26% over the same time-frame. These figures have also trended upward relatively smoothly, like their revenue.
The balance sheet
The second reason why these companies may be valued lower than the market is the debt carried on their balance sheets.
At the end of the last quarter Kellogg was holding on to $6.3 billion of long-term debt. It reported stockholders' equity of $3.5 billion, which gives us a long-term debt to equity ratio of 1.8 that is far from favorable.
Energizer on the other hand reported long-term debt of $1.9 billion and stockholders' equity of $2.5 billion. This gives us a more conservative long-term debt to equity ratio of 0.76.
Though both of these companies have their fair share of debt, it is not overly burdensome on either. Kellogg reported an interest expense of $235 million for the last twelve months, which was easily covered by its $2.8 billion of EBITDA, or earnings before interest, taxes, depreciation, and amortization.
Meanwhile Energizer reported an interest expense of $128 million over the latest twelve months, which was again easily covered by the company's $800 million of EBITDA.
Why investors should be interested
So if the companies have high debt and slow growth, why should we look at them as investment candidates?
First off, slow growth is fine as long as it is consistent, and both of these companies can offer you consistency. Kellogg and Energizer offer consumers products that they use every day and this means that their sales will occur again and again, producing fairly predictable results.
Both these companies' debts may be high, but that is somewhat normal in this industry as companies often take on debt to acquire other companies or other companies' brands. Again, both Kellogg and Energizer are operating efficiently and paying their debts easily.
If you were to purchase shares of Kellogg and Energizer you would get steady and consistent companies. You would also start to receive regular dividend checks that would represent 2.8% of Kellogg's current share price and 2% of Energizer's current share price.
You will rarely find a company that has zero unfavorable investment characteristics. And if you do find a company that seems perfect, there is a good chance the market will be pricing it sky-high.
Kellogg and Energizer have a couple of unfavorable characteristics, which along with some poor short-term expectations may have caused these two companies to be priced below fair value. However, both of these companies are simple and well-run, and they will be steady earners that you will not have to worry about. If you buy pieces of these two now you can most likely sit back, relax, and collect your dividend checks for many years to come.