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Late in 2021, I believed that Edgewell Personal Care (NYSE:EPC) was taking care when the business acquired Billie, marking an interesting bolt-on transaction. The goal was to add an interesting and growing player to revamp the lack of organic growth, but this has not really turned out that way.
Amidst stagnant sales for a long period of time, despite expensive acquisitions, a low double-digit (adjusted) earnings multiple is not enough to ignite appeal, certainly not if we take into account a still substantial leverage position as well.
About Edgewell
Edgewell describes itself as a diversified global shaving business, including categories like men’s grooming, sun & skin and personal hygiene. The business is quite diversified, with both North American and international sales being equally flat, while the company has seen solid diversification between men and women, as well as between preps, brands and disposables.
Despite operating in long term GDP growth like markets, the business has been hit hard by competitive pressures, as it seems a bit too small to compete effectively. A $2.6 billion business in 2014, it has seen sales come down to $2.1 billion in 2019, although it managed to post GAAP operating margins around 15%. Nonetheless, a $100 stock in 2015 has fallen to levels around the $30 mark in 2019 as premium multiples have fallen to a discount.
Ahead of the pandemic, the company announced a $1.4 billion deal for Harry’s in May 2019, a deal set to add $325 million in sales. This marked a premium multiple to be paid for a premium and growing brand, although the FTC ruled against the deal.
Instead, the company acquired CREMO in a $235 million deal in the summer of 2020, adding $58 million in profitable sales. In November that year, the company posted a 9% fall in 2020 sales to $1.95 billion, with the results hurt by the pandemic of course (when beards were in fashion). Adjusted earnings were reported at $2.73 per share, although that quite some adjustments were made.
The company did see a recovery on the topline in 2021, with earnings coming in at $3.02 per share (adjusted, that is) as net debt of $781 million worked down to a 2.1 times leverage ratio. This made that shares recovered to $44 per share, while the company guided for modest growth in 2022.
Taking advantage of the rebound of momentum in 2021, the company acquired premier feminine shave brand Billie in a $310 million deal, pushing up net debt to just over a billion, with leverage ratios seen around 3 times. The deal came at a 3.5 times sales multiple, adding $90 million in sales, adding 4-5% to revenues.
A resulting 14-15 times earnings multiple looked reasonable, yet these are adjusted earnings and leverage is high, and the company has seen long term underperformance, although that M&A hopefully would structurally improve the growth profile of the business. Amidst all this I thought that shares traded around fair value, with no imminent appeal seen, as some credits were due to management.
Stagnating
After enjoying a short run higher around the $50 mark early in 2022, shares have been trading in a $35-$45 range ever since.
In November 2022, Edgewell posted fiscal 2022 sales of $2.17 billion, up 4% on the year before. This was driven by the Billie deal, with organic growth of 1.2% trailing inflation rates, suggesting that organic growth still remains an issue. The problem is that margin pressure was seen, with adjusted earnings seen down from $3.02 per share in 2021 to $2.57 per share in 2022.
Adjusted EBITDA fell from nearly $367 million in 2021 to $335 million in 2022, as net debt ticked up to $1.20 billion, due to the acquisition of Billie slower growth and some buyback as well, as leverage came in at 3.6 times.
While the company guided for 2023 sales to grow by 3-5%, EBITDA and earnings per share were seen down further. Full year EBITDA was seen down to $320-$335 million, with earnings per share seen around of $2.00 per share.
Through the year 2023, Edgewell posted a near 4% increase in sales to $2.25 billion, in line with the original audience for the year. Adjusted EBITDA of $340 million actually topped the original guidance, with adjusted earnings posted at $2.56 per share, as these earnings would nearly come in at $3 per share, if not for adverse currency moves. This feels like a huge currency headwind in relation to other names and actual currency moves seen here.
Net debt ticked down to $1.16 billion and based on the minor improvement in adjusted EBITDA, leverage ratios have improved in a very modest fashion to 3.4 times EBITDA. For the current fiscal year 2024, the company sees a 2-4% increase in organic sales, with reported sales seen up a percent less. Adjusted earnings per share are seen up 7% at the midpoint of the guidance, with earnings seen between $2.65 and $2.85 per share, and EBITDA seen up to $340-$352 million.
And Now?
Trading at $35 per share, Edgewell trades around 12-13 times adjusted earnings, which is a non-demanding multiple but comes with a few considerations. These include the fact that these are adjusted earnings, with GAAP earnings at times being hurt by some charges. Moreover, there still is quite a substantial net debt load out there, but the biggest reasons it that of lack of execution.
This relates to the fact that sales are now less than those reported a decade ago, which marks real declines, certainly if we take into account inflation, which of course has been running higher in recent times. At the same time, the company has occasionally announced expensive bolt-on deals, typically valued at far richer sales multiples, as these multiples have failed to provide a real boost to the long term organic growth pace here.
This makes me quite cautious given the lack of perceived quality, despite the relative attractive valuation here. If we adjust for the lack of performance, adjusted earnings and some leverage, I am not automatically appealed to the lower earnings multiples at which its shares trade here.
