Edgewell Personal Care Is Poised for Growth

The personal care company is suffering from inflationary pressures, but showing strong sales growth

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Aug 04, 2022
Summary
  • Edgewell manufactures and markets personal care products in three key segments.
  • Like most consumer product companies, Edgewell is experiencing higher input costs and supply chain issues.
  • Edgewell sells at reasonable valuation multiples and is poised for strong earnings per share growth next year.
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One of most interesting corporate histories in the market today might be Edgewell Personal Care Co. (

EPC, Financial), a personal care company whose products include razors, sunscreen and personal cleaning products. Its history dates back to the 1700s, when the company was famous for making battle swords, which over time developed into making razors for shaving. Wilkinson Sword was the first to develop what was called a “roller safety razor.”

The company manufactures and markets personal care products worldwide and operates in three key segments, Wet Shave, Sun and Skin Care and Feminine Care. The Wet Shave segment provides razor handles and refillable blades as well as disposable shave products for men and women under the Schick, Wilkinson Sword, Edge, Skintimate, Shave Guard and Personna brands.

The Sun and Skin Care segment provides general sunscreen protection and tanning products under the Banana Boat and Hawaiian Tropic brands. Other skincare products include antibacterial hand wipes, alcohol sanitizing wipes and hand sanitizer gels under the Wet Ones brand.

The Feminine Care segment provides tampons under the Playtex Gentle Glide 360°, Playtex Sport, Playtex and o.b. brands as well as pads and liners under the Stayfree and Carefree brands.

The company was formerly known as Energizer Holdings and changed its name to Edgewell Personal Care Company in June 2015 after divesting the battery business. Founded in 1772, Edgewell currently has a market capitalization of $2.1 billion.

Financial review

The company reported fiscal third-quarter results for the period ending June 30 on August 4th. Net sales increased 9% on an organic basis due to increased volumes and higher pricing in the quarter. North American organic net sales increased 9.3%, while international markets increased 8.4%.

Gross margins were negatively affected by the ongoing inflation and supply chain issues. The gross profit was $240.6 million, compared to $270.3 million in the prior-year period, and the gross margin was 38.6% compared to 47.1% a year ago. Gross margins declined as a result of higher commodity and transportation costs. Increased pricing actions were not enough to offset these higher input costs. Adjusted operating income was $70.3 million, or 11.3% of net sales, compared to $80.6 million in the year-ago period.

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The company has $182 million in cash and equivalents on the balance sheet and $1.38 billion in total debt. The company’s leverage ratio is 3.5, which is slightly elevated due to recent acquisitions.

Valuation

The company updated its annual guidance in the third-quarter press release, which called for organic sales growth of 4% and adjusted earnings per share in the $2.50 to $2.60 range. The company expects ongoing cost pressures and believes gross margins will decline 390 basis points. Adjusted Ebitda is expected to be in the range of $335 million to $340 million for the year.

Analyst consensus earnings per share estimates are $2.51 for 2022 and $2.83 for the following year. The company is selling at 16 times this year's earnings and a more reasonable 14 times next year's earnings estimates as inflationary pressures are reduced.

The GuruFocus discounted cash flow calculator, using a more normalized earnings per share of $2.83 as the starting point and 6% long-term growth, creates a value of $47. The company’s earnings per share growth goals are greater than 6% over time.

Guru trades

Gurus who have purchased Edgewell stock recently include

Charles Brandes (Trades, Portfolio)' Brandes Investments and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates. Gurus who have reduced their positions in the stock include Michael Price (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Conclusion

The company’s wet shave products are still facing headwinds due to the men’s beard trend in recent years. However, other products lines have more than offset those declines and fashion trends tend to reverse themselves over time.

With strong free cash flow generation over time, a reasonably safe balance sheet and iconic brand strength, the company is positioned for long-term shareholder returns. If the inflationary pressures recede next year and organic sales growth remains strong, Edgewell should produce solid double-digit earnings growth in the near to mid term.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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