Edgewell Personal Care Stock: Attractive Opportunity Despite Weak Spots (NYSE:EPC)

One of the things that I love most about value investing is the idea that you don’t always have to buy into a company that is growing quarter after quarter or year after year. Ideally, you do want growth. But if shares are cheap enough, growth is not necessary in order to achieve nice upside. One company that fits this description, at least in my professional opinion, is Edgewell Personal Care Company (NYSE:EPC). For those not familiar with the business, it operates as a provider of personal care products. Its business involves selling razors, sun and skin care products, feminine care products, and more.

Back in early May of this year, I discussed how the business had done fundamentally for the second quarter of its 2024 fiscal year. Shares had risen nicely in response to that development, but they were still trailing the S&P 500 since I had previously written about the company in September 2023. Because of how cheap the stock was, I believed that additional upside would be warranted. But since then, we have seen a bit of a pullback, with shares down 5.8% while the S&P 500 is up 4.9%. To those who are short-term investors, this might seem discouraging. But based on another review of the most recent data provided by management, I would argue that the market is being overly pessimistic here. Because of this, I’ve decided to keep the company rated a ‘buy’ for now.

Mixed results, but cheap shares

The most recent data that we have regarding Edgewell Personal Care Company covers the third quarter of the company’s 2024 fiscal year. During this time, revenue for the company came in at $647.8 million. That’s down 0.3% compared to the $650 million the company reported one year earlier. At first glance, this is sure to be discouraging. However, it’s very important to dig deeper into the details. The only reason why revenue dropped during this time was because of foreign currency fluctuations that worked against it. Actual organic revenue grew by $4 million year over year. This, management said, was driven mostly by a 6.1% increase in the international markets in which it operates. But in North America, sales dropped by 2.4% as lower volumes more than offset higher prices.

Moving into the profit side of things, we saw some weakness as well. Net income dipped from $53 million to $49 million. This was in spite of the fact that the firm’s gross profit margin grew from 43.1% to 44.3%. Higher prices and certain moves that management made that they described as ‘revenue management’ more than offset inflationary pressures, lower volumes, an unfavorable product mix, and foreign currency fluctuations. The weak spot for the business, then, came from its selling, general, and administrative costs. This expanded from 14.8% of sales to 17%. Management said that this was because of higher compensation costs and legal costs. I wish that these would have been one-time items. The legal costs likely will be. But the higher compensation costs certainly won’t be.

Other profitability metrics suffered for the most part. Take operating cash flow as an example. It fell rather precipitously from $166.4 million to $101.2 million. If we adjust for changes in working capital though, we get a decline from $88 million to $73.6 million. The only profitability metric to show an improvement year over year was EBITDA. It rose from $109.7 million to $117.2 million. It is important to note that mixed results have been the story for much of this year. In the chart above, you can see financial results for the first nine months of the 2024 fiscal year compared to the same time last year. Revenue, profits, adjusted operating cash flows, and EBITDA were all higher year over year. However, operating cash flow itself was down.

Digging deeper

For the purpose of being comprehensive, we should dig a bit more into the fundamental past of Edgewell Personal Care Company. Even though I have decided to rate the company a soft ‘buy’, it is true that the business has had a rough several years in the past. From 2014 through 2020, sales declined each year. It was only starting in 2021 that the picture began to improve. This is no coincidence. Management put forward a plan to reinvent the business that involved focusing on key growth opportunities and stabilizing some of the more profitable businesses that no longer offer material upside.

In the chart above, you can see revenue for the company as a whole, as well as revenue for each of its three operating segments. If you compare these figures to the official figures reported on financial statements, then not all of them will match up. This is because I stripped from the total revenue figure certain sales that were non-core to the business that are no longer part of it. Instead, I’m focusing only on revenue associated with its three operating segments. As you can see, two of the three segments, Wet Shave and Feminine Care, saw declines over the span of several years. Even today, Feminine Care is more or less staying range bound. For the purpose of this analysis, because of how small its contribution is and because of how stable results have been as of late, I’m not really going to focus too much on it. Rather, I would like to pay attention to Wet Shave and Sun and Skin Care.

From 2014 through 2020, Wet Shave saw revenue decline substantially, from $1.59 billion to $1.16 billion. Even though this looks painful, we do need to be mindful of what contributed to the Strop. In the chart above, you can see, for the window of time from 2014 through 2023, aggregate changes by category for this segment. Organic revenue dropped $208.2 million during this window of time. Most of this took place from 2018 through 2020 when the aggregate decline in organic revenue totaled $211.4 million. This weakness, according to management, was driven by a combination of factors, primarily the pandemic and a change in consumer preferences.

Believe it or not, for several years now, there has been a shift in preferences when it comes to shaving. According to one source, for instance, back in 2011, only 37% of men had a beard or mustache. This number grew to 42% in 2016 before climbing further to 54% last year. Rising cost of living played a role in this, since letting your facial hair grow is cheaper than products used to ensure a close shave. Greater social isolation caused by the COVID-19 pandemic contributed to this. The move toward remote work was also a contributor. And, interestingly enough, this change is also likely the result of men’s response to preferences that women have. Back in 2011, 66% of women said that they preferred the appearance of a man without a beard. That number now is only 36%.

Other changes to revenue involving this segment involve declines from its business in Venezuela and a huge hit taken because of foreign currency fluctuations. If we remove these from the equation, the decline in sales would not look so bad. Meanwhile, the company benefited to the tune of $86.9 million from acquisitions net of divestitures.

With figures like this, I can understand why some investors would be cautious when it comes to a company like Edgewell Personal Care Company. After all, in 2023, the Wet Shave segment accounted for 54.7% of the company’s overall revenue. The bright spot, however, involves the company’s Sun and Skin Care operations. Ever since 2015, this unit has seen its revenue increase year after year. The one exception was in 2020 when sales came in $1.1 million lower than what was seen in 2019. As the chart above illustrates, the business benefited to the tune of $142 million during this window of time because of organic growth. Acquisitions net of divestitures added $97.4 million to the top line, while foreign currency fluctuations impacted sales by only $33.2 million.

The organic growth is not a coincidence. The fact of the matter is that these operations focus a great deal on certain male-oriented products. Products like Banana Boat and Hawaiian Tropic cater to sun and skin care. According to one source, this is a rather rapidly growing market for men. Globally, it totaled $16 billion in 2023. And by 2033, it’s expected to grow to $29.6 billion. That implies an annualized growth rate of 6.3%. Meanwhile, the company’s male grooming products such as Bulldog and Jack Black that sell things like moisturizers, facial cleansers, body wash, deodorants, and more, are also part of a sizable and growing market. For the US alone, this market was worth $46.5 billion last year. And it’s expected to grow at an annualized rate of about 8.3% between 2024 and 2030. Globally, it was worth about $202.6 billion in 2022. And between 2023 and 2030, it’s expected to grow by 8% per annum.

The fact that so much of the increase in sales seen over the prior several years were driven by acquisitions shows management understood this opportunity. It also shows that they made a concerted effort to best position themselves so as to offset the risks involving the Wet Shave space. Another great thing about this category of products is that margins are robust. In the chart above, you can see the profit margins for each of the company’s operating segments from 2021 through 2023, as well as for the first three quarters of this year compared to the same time last year. Even though the Wet Shave segment did see a nice increase in its profit margin this year compared to last year, from 2021 through 2023 there was a consistent decline. Meanwhile, the Sun and Skin Care category has enjoyed consistent and robust profit margins.

This is not to say that there aren’t any risks for the company. The fact of the matter is that there are. For instance, if the market for shaving products deteriorates too much, it’s possible that the enterprise could suffer. I see this as unlikely considering how strong sales growth has been when it comes to the Sun and Skin Care product line. Even if there is a deterioration in revenue for the Wet Shave market, I suspect that the Sun and Skin Care category can continue to grow at a nice clip. Obviously, making the wrong bets in the Sun and Skin Care space can also be problematic. Buying into a brand that might be about to decline, it could be an expensive and painful lesson for shareholders. On top of this, there is always the possibility that a decline in the economy could dent consumer spending enough so as to harm even this growth space. But so far, that doesn’t appear to be happening.

Valuation

For this, year in its entirety, management said that organic revenue should be up by about 1%. This is actually down from the prior expected guidance of 2%. Considering that, for the first nine months of this year, organic revenue was up 1.1% on a year-over-year basis, this seems to be pretty locked in. Adjusted earnings per share should be around $3, which would translate to net profits, on an adjusted basis, of $150.3 million. That would be an improvement over the $132.7 million reported at the same time last year. Management also guided for EBITDA of $356 million. They didn’t give any concrete estimates when it came to operating cash flow. But they did say that capital expenditures should be about 2.5% of sales, while free cash flow should be about $170 million. If we do that math, we get about $226.9 million. Applying the same year-over-year relationship between operating cash flow and adjusted operating cash flow would give us the latter coming in at about $238.2 million.

Using these estimates provided by management, and also calculated to some extent on my end, I was able to value the company on a forward basis for 2024. The results can be seen in the chart above. I also included in that chart how the company is valued using results for the 2023 fiscal year. On a price to earnings basis, shares look closer to being fairly valued. But relative to cash flows, the stock is still attractively priced. This is true not only on an absolute basis, but also relative to similar companies. In the table below, I compared Edgewell Personal Care Company to five similar enterprises. These companies are similar in that they also play in the personal care market. Each has a significant presence in the markets in which they play in. Some of them, like Kenvue (KVUE), have other types of operations as well. In its case, it also sells Tylenol, Motrin, and other related products. Unilever (UL), meanwhile, is a major consumer care business, but it also sells things like ice cream. However, at their core, they have the same sort of emphasis and similar product likes to our candidate, hence the reason for their inclusion as comparable businesses. In the table, I made this comparison using the price to earnings approach, the price to operating cash flow approach, and the EV to EBITDA approach. And in each of these cases, our candidate ended up being the cheapest of the group.

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Takeaway

As things stand, I would say that Edgewell Personal Care Company is doing quite well for itself. It is disappointing to see the recent drop in sales. But most of this year has been positive, and the decline in question was not because of a weakness in the business so much as it was because of foreign currency. Current guidance suggests improvements this year on the bottom line. So that is definitely promising. When you add on top of this how the stock is currently priced, I do think that a soft ‘buy’ rating is appropriate at this moment.