There were 103 52-week highs in Tuesday trading, a little over four times the 52-week lows.
One of the 52-week lows was Edgewell Personal Care (EPC), the maker of Schick razors, Edge shaving gel, and many other products. It also hit a two-year low yesterday at $33.27. The last time it traded lower than this was in May 2022. Its all-time high was $107.37 in May 2015.
I don’t know if it can get back to triple digits. However, if you’re an aggressive investor, the maker of personal care products is worth a second look.
Here’s why.
The Valuation Is Low
I don’t think there’s any question about Edgewell’s struggle to find a dominant place in the global personal care industry. Since CEO Rod Little took over in March 2019, its shares have lost 21% of their value, while its revenue and operating earnings have gone sideways over six fiscal years (September year-end).
You don’t buy EPC stock because of its growth. However, you could argue that its current valuation suggests that its shares are undervalued.
For example, its enterprise value is $2.79 billion, 1.2x its revenue, according to S&P Global Market Intelligence. Compare that to some of its peers:
Source: S&P Global Market Intelligence
The average of the seven peers listed above is 2.8x revenue. Procter & Gamble (PG), which owns Gillette, a direct competitor, trades at 5.0x revenue.
So, there’s a case to be made on a price-to-sales basis.
Comparing all eight companies discussed above, the average enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) is 19.0x, more than double EPC’s at 8.0x.
Here's one last comparison to make my point.
The company's free cash flow in the trailing 12 months ended June 30 was $156 million. Based on an enterprise value of $2.79 billion, its free cash flow yield is 5.4%. I consider anything between 4% and 8% to be fair value.
P&G’s free cash flow yield is 3.9%. I’m sure e.l.f. Beauty’s (ELF) is even lower.
There’s no question it’s cheaper than most of its peers. So, what’s holding it back?
It Has a Considerable Amount of Debt
Edgewell’s net debt at the end of June was $1.16 billion, or 69% of its market cap. P&G’s net debt was $24.24 billion, or just 6%. An investor interested in a lower-risk equity investment will go for PG stock over EPC every day of the week and twice on Sundays. That is not debatable.
According to S&P Global Market Intelligence, Edgewell’s Altman Z-Score is 1.93. The Altman Z-Score is a calculation intended to predict the likelihood of bankruptcy proceedings in the next 24 months. Anything over 1.81 is considered to be financially solvent and not at risk of bankruptcy in the next two years.
Of course, that score changes every quarter, up and down, so it’s something to keep an eye on. PG’s, as expected, is a high 5.64.
As of June 30, Edgewell’s trailing 12-month interest expense was $78 million. Its EBITDA of $347 million is 4.5x, suggesting it has no trouble meeting the interest payments on its debt obligations.
The Potential Upside
In Q3 2024, Edgewell’s organic sales, excluding currency, rose 0.6% to $648 million. While that’s nothing to write home about, it’s positive, and that's what matters.
Further, it reported adjusted earnings per share of $1.22 in the quarter, 23% higher than a year earlier. This increase was due, in large part, to a 120-basis-point increase in its gross margin to 44.3%. On an adjusted basis, its gross margin increased 160 basis points due to higher prices and productivity savings offset by lower volume.
The company's Sun and Skin Care segment, which includes Hawaiian Tropic, Banana Boat, and Wet Ones, drove profitability in the third quarter. The segment’s organic sales increased 5.1% to $257 million, while its segment profit was $64 million, 4.6% higher than a year ago.
For fiscal 2024, the company expects adjusted EPS of $3.00, up from the previous guidance of $2.90 at the midpoint, on a 1% decrease in organic sales.
“Our transformation that began just over three years ago continues to yield positive results. In order to accelerate our progress across key priorities, we announced, in a separate press release today, key changes to enhance our leadership team and simplify our operating model,” stated CEO Rod Little.
“I’m confident that these changes will strengthen our business and better position Edgewell for sustainable top and bottom-line growth.”
As part of the leadership changes, it promoted Dan Sullivan, CFO and President of its Europe and Latin American region, to CFO and Francesca Weissman, Senior Vice President of Finance and Business Strategy, to fill the CFO role. Both take effect on Dec. 1.
These senior executives joined the company in 2019 as part of Little’s plan to transform Edgewell. The plan has taken a while to take shape, but these moves signal that the company has the right people to take it to the next level.
EPC stock trades at 11.4x its $3 estimate for 2024, a lower multiple than it has been since September 2020.
While I’m not a technical analyst, if you’re an aggressive investor, its share price looks to have bottomed with a relative strength of 29.48%. Below 30, it’s an indication that its stock is oversold.
That said, I wouldn’t put this in your retirement account. It’s not a sure thing.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
