Stock Options To The Rescue! Energizer Holdings (ENR)
Today we’re going to look at a stock replacement strategy on Energizer Holdings. It allows you to reduce your risk and gives you upside potential.
Here’s what happened…
Energizer Holdings (ENR) shares have fallen 12% from $77.77 to $68.40 after they missed profit and sales estimates last quarter. But they stood by their full year earnings forecast.
Here’s the deal…
ENR’s revenue dropped 9% from the same quarter last year to $1.12 billion. Their sales fell well short of analyst estimates of $1.21 billion.
Earnings dropped off a cliff as well. EPS fell 14% year-over-year to $1.18. And they missed Wall Street analysts’ estimates by 14 cents.
The weak results were fueled by a loss of market share in their two biggest products – batteries and razor blades.
Here’s the kicker…
Last quarter, the consumer products maker felt the sting of a sluggish global economy and a strong US Dollar. But they also got their tail kicked by the competition.
Sales of their Energizer batteries were down because they lost shelf space to Rayovac batteries at Wal-Mart (WMT). And WMT accounts for 20% of their battery sales.
Their Schick razor blade business was also down. Their sales were hurt by Proctor & Gamble (PG) stepping up their advertising and discounts of their Gillette brands.
After reporting the miserable quarter, management said they’re going to make changes to their operations. But they stood by their full year earnings outlook of $6.00 to $6.20 per share. However, investors have punished the stock as if there’s no chance of them living up to these estimates.
Here’s what to do now…
If you bought ENR before earnings, you’ve seen your investment take a big hit over the last few days. And there’s still plenty of downside if they don’t get things turned around. However, there’s a good chance the stock will bounce back if they’re able to deliver on their full year earnings forecast.
Let’s assume you bought 100 shares of ENR at $78 before earnings. At a recent price of $68.40, you’re sitting on a 12% loss.
Selling ENR and buying the ENR November 2012 $70 call option for $2.80 will reduce your risk and give you upside potential if ENR rebounds later this year.
By selling your ENR stock at $68.40 per share, you’re taking a loss of $960. And it will cost you $280 to buy the November 2012 $70 call option.
This strategy limits your losses to the loss on the sale of the stock plus the cost of the option. In this case, your losses are capped at $1,240 or 15%.
But ENR’s stock has much more risk. If management doesn’t execute their plan to revive earnings growth next quarter, they’ll likely be forced to slash their full year earnings forecast. And the stock could tumble back to the 2010 low around $50.
If you simply hold onto the stock hoping for a rebound, you could be staring at a massive 35% loss on this trade. I don’t know about you, but I’ll take a 15% loss over a 35% loss any day.
What’s more, buying a call option gives you a chance to recoup your losses if the stock rebounds next quarter.
Don’t forget, the stock is priced as though ENR will fall short of their full year earnings forecast. If management confirms they’re on track to meet their full year earnings forecast at the next quarterly earnings in November, we’ll likely see ENR soar back above $80.
You’ll turn a profit on the option if ENR is above $72.80 when the option expires in November.
In order for the rescue to be a success, we need to recoup $1,240. You’ll breakeven on the trade if ENR rebounds to $82.40 per share by the time the option expires in November. No small task given the size of the loss, but it’s not out of the question.
In essence, replacing your ENR stock holdings with a call option dramatically reduces your risk and gives you upside if the stock rebounds next quarter.
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Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
