Throughout the years we have been quite successful in identifying and investing in companies that have great consumer franchises, particularly after they have temporarily lost their way and their shares have declined precipitously. The obvious suspects such as Disney, McDonalds and Home Depot, among others, all appeared in Asset Analysis Focus, after they fell from grace.
There is another group of companies, however, that are harder to identify, but they too own great franchises which are masked by their corporate name. In many of the instances they hold multiple franchises in their quiver. Utilizing a sum of the parts analysis, the various companies beneath the corporate umbrella, if separated, would trade at a higher price than as a single entity. U.S. Shoe, for example, owned multiple businesses. We believed at the time their LensCrafters business was worth more than the entire entity. Ultimately, Luxottica bought the whole company at a price that was quite close to our estimate of intrinsic value.
Whitman owned three disparate businesses underneath its corporate umbrella, Midas Muffler, Hussman, the world’s largest commercial refrigerator company, and Pepsi Americas, one of the largest independent Pepsi bottlers. All three were spun out and each of them was ultimately acquired. We were attracted to a company named Stokely Van-Camp, not for our love of baked beans, but because it owned Gatorade.
A recent example, of the aforementioned is Energizer, which was profiled in Asset Analysis Focus in March of 2012. Our thesis was quite simple: Energizer was not just a battery company, but also owned a number of other great brands, including Schick razors, Playtex, Banana Boat, Hawaiian Tropic and Diaper Genie. As the table below illustrates, at the time of the report Energizer was trading at 7.8 LTM EBITDA and 17.4x LTM earnings and was below its peers in the consumer products space.
|Church and Dwight||12.3||23.2||18.5|
|Procter & Gamble||11.6||19.8||15.5|
|Average excl. ENR||11.1||19.6||15.7|
We believed the low multiple afforded to Energizer was due to the company’s business mix since at that point they derived a little less than 50% of their sales from the low growth battery business (down from ~70% in 2007). The personal care product division was growing rapidly and we knew eventual the vast majority of the earnings of the company would come from that division. In order to determine what we believed was the private market value for the whole company, we valued the companies two distinct divisions separately. We valued the low growth household products business (the battery portion of their business) at 7x our estimate of 2014 EBITDA and their faster growing Personal Care segment (Schick, Banana Boat etc.) conservatively at 9.0x our estimate of 2014 EBITDA, which gave us a value of ~$102 per share for the entire company (the company was trading at ~$74 at the time of the report).
Well lightning struck again! While we were never sure exactly how Energizer’s value would get unlocked, we knew that given the strong brands underneath its Energizer moniker, its stock price would not remain inexpensive forever. We were quite pleased when on April 30th Energizer announced that it would be splitting the household products and the personal care products into two separately traded public vehicles. Pre-announcement the shares were trading at $97.71 and are currently trading at $~114 per share. There is probably more to come. We believe that once the breakup takes effect in 2015, there is a distinct possibility that either one or both of the entities could be acquired by a third party. Obviously, this helps to reinforce our conviction that if you purchase a great consumer franchise at a bargain price, only good things will eventually occur.
So who is next? Why not take a look at Clorox.
To read our original report on Energizer Holdings, please click here.