They outperform comparable stocks for years

“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.

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Topic: Spinoffs

Edgewell primed for takeover bid


CU Dividends LISTEN:  

EDGEWELL PERSONAL CARE $74 (New York symbol EPC; Consumer sector; Shares outstanding: 57.4 million; Market cap: $4.2 billion; Takeover Target Rating: Highest; No dividends paid; TSINetwork Rating: Average; www. edgewell.com) began trading in July 2015 after Energizer Holdings, Inc. split into Edgewell and battery maker Energizer (symbol ENR on New York—see box below).

We think Edgewell has strong takeover prospects. The company’s product range includes shaving products (60% of sales) sold under brand names such as Schick, Edge and Wilkinson Sword; its sun and skin-care products (18%) include the brands Hawaiian Tropic and Banana Boat; its feminine care brands (16%) include Playtex, Carefree, o.b. and Stayfree; and its infant care lines (6%) are sold under the Playtex, Diaper Genie and Wet Ones brands.

They outperform comparable stocks for years

“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.

 I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

For the year ended September 30, 2015, Edgewell lost $4.78 a share on revenue of $2.42 billion. Excluding writedowns and spinoff costs, the company made $2.80 a share. Sales fell 2.4% in fiscal 2016, to $2.36 billion, but excluding the effect of a high U.S. dollar, revenue rose 2.8%. Earnings per share jumped 27.5%, to $3.57.

For the third quarter ended June 30, 2017, Edgewell’s revenue slipped, to $637.5 million from $645.1 million a year earlier. However, earnings jumped 68.2%, to $1.11 from $0.66, largely due to strong cost savings, lower commodity costs and increased sales for its higher-profit product lines.

The company’s long-term debt of $1.58 billion is a somewhat high 38% of its market cap. However, Edgewell holds cash of $454.9 million, or $7.93 a share.

The company’s shares have moved down about 20% since its split from Energizer. Intense competition, especially in the shaving category, has weighed on the earnings of most personal-care-products firms, including Edgewell.

Most of that competition is due to aggressive new firms such as Dollar Shave Club, an Internet-based firm that sells disposable razor blades. Unilever plc (symbol UL on New York) bought Dollar Shave last year for $1 billion.

Despite its sluggish sales and profits, Edgewell has wellknown brands with the potential for much stronger revenue. That’s attractive to would-be acquirers. The company also holds the largest market share for sunscreen in the U.S., and its Schick razors are the only major competitor to Procter & Gamble’s Gillette brand (for more on Procter & Gamble, see page 5). To boost its market share, Schick recently launched its Hydro Connect line of replacement blades that fit Gillette razors but cost a lot less than Gillette’s. Consumers order them over the Internet.

Meanwhile, Edgewell’s profit margins are low—its shaving margins are 20%, compared to Proctor & Gamble’s 30%. As well, its brands lack exposure in emerging markets. That’s particularly attractive for firms, such as Unilever, that sell mostly in those markets and want to expand.

Currently, 55% of Edgewell’s sales are in the U.S. This, too, could make it attractive to Unilever, or perhaps Colgate- Palmolive (symbol CL on New York). That second company now does 75% of its business outside the U.S. Other possible acquirers are U.K.-based Reckitt Benckiser, and U.S. firms Kimberly-Clark and Church & Dwight.

Internationally, leaders in consumer products are under great pressure to accelerate growth, and acquisitions provide a quick way to do that. Edgewell trades at 18.6 times its forecast 2017 earnings of $3.98 a share, but it has lots of room to cut costs and expand sales. Its low $4.3 billion market cap makes it an easily affordable acquisition.

Edgewell rates Highest in our Takeover Target Rating. The stock is a buy.

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