bymuratdeniz/E+ via Getty Images Before evaluating any potential value, we like to first turn to the company’s long-term technical chart as well as its short interest numbers to see if the company has momentum on its side. Furthermore, strong insider buying is usually a tell-tale sign that shares are undervalued. With respect to Edgewell Personal Care Company (NYSE: EPC ), there have only been a few minor insider selling transactions of late which really doesn’t tell us a whole lot. With respect to short-interest, the percentage of the float shorted at present comes in at 5.4%. This means the short-interest ratio has been consistently rising in recent months and is getting closer to that 7% mark which is invariably the cut-off level for us for potential long plays.
On the long-term chart, however, the MACD moving averages are just entering positive territory at present, and shares printed higher highs in January of this year. Furthermore, that break out above the multi-year trend line is definitely a bullish move although shares now need to push on to confirm a new bullish trend in earnest. Long Term Chart Of EPC (Stockcharts.com) Suffice it to say, with respect to timing a long-entry here, EPC has certainly more proving to do. Therefore, let’s look more closely at the company’s fundamentals by looking at its profitability trends as well as its valuation to see if downside risk is limited here.
For any of our potential value plays, it is essential that the company in question is turning a profit. This point can never be overestimated as even small incremental gains can end up transforming a firm over the long term if indeed those gains are compounded. On the other hand, an unprofitable firm invariably needs to turn to outside funding (usually through share dilution, asset sales, or more debt) to keep the show on the road. This brings a time element to proceedings and added pressure to get the financials in order.
Edgewell over the past four quarters has made roughly $111 million in net profit. Edgewell once more turned a profit in Q1 this year reporting $0.42 per share as consumer demand continued to improve in the face of supply chain and cost headwinds. Momentum is expected to continue for the remainder of this fiscal year with $0.96 per share the bottom line number expected for the fourth quarter. Earnings Estimates For EPG (Seeking Alpha) EPC’s current return on invested capital comes in at approximately 5.82% over the past four quarters which is slightly below its 5-year average of 6.33%. Although EPC’s ROIC percentage is lower than what we usually like in our value plays, we must remember that the sector’s ROIC comes in at just under 7%. The important metric as stated earlier is that the company is profitable. Furthermore, the stock’s valuation plays a huge part in successful investing for the long haul.
Based on the $111 million in net profit ( TTM ) mentioned above and sales of $2.1 billion over the same time frame, EPC’s earnings yield at present comes in at 5.3%. Analysts who cover this company continue to see similar bullish trends going into fiscal 2023 not only concerning earnings but also with respect to EPC’s lower price to book ratio as well as its price to sales ratio (Forward ratios of P/B of 1.2 & P/S of 0.95)
Suffice it to say sales (that will obviously be aided by the Billie acquisition in fiscal 2022) are expected to hit close to $2.2 billion this year. However, gross margins are expected to fall on supply chain and inflationary headwinds. So despite the fact that bottom line sequential quarterly momentum is expected to continue for the remainder of the year, annual bottom-line growth will not indeed take effect until next year.
So this really is the question. Is EPC today at $38.37 a share worth an investment on the long side considering its return on invested capital is currently 5.82% and its earnings yield is 5.3%? From a fundamental standpoint, we do not think so and we are basing our assumption more on EPC’s profitability as the firm here continues to trail the sector average.
Although EPC is comfortable profitable and generating plenty of cash-flow which is supporting buybacks and the dividend, profitability remains under pressure with both gross and operating margins expected to contract this year. Management will be hoping that strong customer demand in upcoming quarters in the likes of Sun and Women’s Shave can overshadow adverse trends with respect to supply chains, […]
source Edgewell Personal Care: Evaluating Investment Case As A Value Play
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