Energizer (ENR): Upgraded to Buy from Underperform

From Notable Calls

Merrill Lynch is out with a major call on Energizer (NYSE: ENR) upgrading the shares to a Buy from Underperform.

Firm notes they had downgraded ENR to U/P with valuation closer to ~10x NTM EPS ahead of a tough Dec qtr with risk of a weak holiday season and retail inventory de-stocking. But with Q1 in the past, easier comps ahead, and shares off 30% from Jan highs, they expect a near-term bounce. Further, they think this may prove a compelling LT entry point for a solid story that is being given no credit by the market.

Three reasons to buy the stock:

1) shares are at 7.4x Merrill's below cons CY09 EPS est, 2.5 std deviations below the historical mean, and they see more upside than downside to their numbers;

2) the org battery comp swings from +4.6% in Q1 to -8.7% in Q2, as ENR laps one of its worst ever de-stocking qtrs in the yago;

3) they continue to believe there is very little risk to debt covenants, fear of which drove ENR to a trough P/E (5x) in Nov. A trade near-term, but not losing sight of LT story With 60% of sales in batteries, ENR faces tougher macro headwinds than most in HPC, and if the macro setting does not improve, batteries will struggle. But at current levels, the shares adequately reflect this uncertainty and now discount far too much going concern risk. Firm thinks ENR can grow EPS 10% annually in the LT, and current levels offer an opportunity for both a trade or a LT position.

Maintaining EPS estimates, price target of $59
Merrill is not changing their EPS ests or $59 PO. While they are below consensus on EPS, they think the market is discounting even lower numbers. 12-mo target is based on their 2010 est, but near-term, shares could move closer to 9x consensus, or $50. Firm sees downside to $35 if the shares test prior lows, but they think these lows were driven more by covenant concerns, which have eased with better Q1 results. Risks are clearly addt’l retailer de-stocking and worsening macro setting.

Notablecalls: ENR stock is down 12 pts from the Merrill downgrade levels (see NC post from Jan 13), so I think it's long due for a bounce.

I see at least 2 pts worth of upside following this call.

Fore more calls go to http://notablecalls.blogspot.com/

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