SPECTRUM BRANDS HOLDINGS INC SPB
April 08, 2011 - 12:53pm EST by
beep899
2011 2012
Price: 28.00 EPS $0.00 $0.00
Shares Out. (in M): 51 P/E 0.0x 0.0x
Market Cap (in $M): 1,426 P/FCF 0.0x 0.0x
Net Debt (in $M): 1,673 EBIT 0 0
TEV ($): 3,099 TEV/EBIT 0.0x 0.0x

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Description

Spectrum Brands is a global branded consumer products company with product lines that include batteries, shaving and personal care products, pet supplies and home and garden. Brands include Rayovac and VARTA batteries, Remington shaving products, Repel and Cutter insect repellents.

The stock trades around $28.00 and a forward FY2011 and FY2012 (September year-end) EV/EBITDA of 6.4x and 5.5x respectively. At a 7.5x, a multiple more in line with peers, the stock would trade at $38.00 off FY11 and $49.00 off FY12, a 36% and 75% gain, respectively, over the next 6 to 18 months.

Spectrum trades at a lower valuation, arguably, due to three reasons:

1)      SPB is a post-bankruptcy equity that is still reestablishing itself with investors. It came out of bankruptcy in August 2009 and traded on the pink sheets until March 2010. The stock now trades on the NYSE.

 

2)      SPB is 66% owned by two Phil Falcone Harbinger entities. A publicly traded SPAC (symbol HRG)  owns 54% of the equity and a Harbinger hedge fund owns 12.7%. However, Harbinger plans to run the SPAC as a mini-Berkshire going forward and thus has no plans to sell, a factor which over time should quell investor concerns of being too close to Falcone and the negative publicity he has received of late. Harbinger came to be a major holder SPB via purchase of Spectrum debt during bankruptcy.

 

3)      SPB recently completed an acquisition of small appliance maker Russell Hobbs. This was in June of 2010 and investors are only now beginning to see if the acquisition/synergies, etc. are coming through. So far things appear to be working out as planned. It should be noted that the SPB acquisition of Russell Hobbs was prompted by Harbinger, which in addition to owning SPB equity owned Russell Hobbs (a combination of appliance makers Applica and Salton).

 

4)      Recently, Avenue Capital another large post-bankruptcy holder sold 5 shares. This event raised concerns that a large shareholder was ditching the stock and caused the recent sell off. However, it is my understanding that Avenue needed to sell the shares because the fund they were in was nearing the end of its five-year life. It was not a comment on the fundamentals of SPB. In fact, SPB had not long before the sale reported solid earnings that indicated the business and their plan to cut costs and pay down debt was on track.

As of the Q1’11 (Dec) conference call management is on track to grow sales 3% to 4% and generate $455M to $465M in EBITDA and $155M to $165M in cash flow. Debt stands at $1,756M. Management is committed to paying down debt and plans to reduce debt by $200M this fiscal year. $70M has been paid down as of end of Q1. Paying off another $130M would leave FY’11 year-end debt at $1,633M.

 

 

 

SEGMENTS

Spectrum reports their business in three segments, Global Batteries and Appliances, Global Pet and Home and Garden. I refer readers to the 10K and company presentations for greater segment detail that I offer below.

Global Batteries and Appliances:

Batteries represent ~40% of GB&A segment sales and 28% of total company sales. Spectrum manufactures the Rayovac brand (Americas) and VARTA (Europe). Rayovac is the tier two brand behind Energizer and Duracel. They are priced ~20% less, but studies have shown that their batteries last as long as the premium brands and the packaging touts this selling point.

The lower pricing has allowed Rayovac to increase their market share from ~12% to ~18% during the recession. The industry has been in a price war, but the most recent quarter or two the premium brands have gotten more rational and raised prices (or stopped adding extra free batteries to the pack). Some old inventory remains in the channel, but as of now pricing/margins appear to be firming up.

Zinc and steel are among commodity costs, but so far this has not been a major margin buster.

In shaving, Spectrum sells Remington electric shavers and is a value player compared to Phillips Norelco brand and P&G’s Braun.

The acquisition of Russell Hobbs added about ~$800 in revenue to this segment. Appliance brands include George Foreman, Black & Decker Home and Russell Hobbs.

Global Pet Supplies

Spectrum’s specialty pet brands include 8in1, Dingo, Firstrax, Nature’s Miracle and Wild Harvest, among others.  The industry is fragmented and Spectrum’s brands are generally considered quality brands.

Home and Garden

Spectrum sells leading insecticides, herbicides, garden and indoor plant foods and plant care treatments. Brands include Hot Shot, Cutter and Repel, Spectracide, Real-Kill and Garden Safe.

 

 2011 estimates

 REVENUE BY SEGMENT

 Revenue

 % of Total

     Batteries 

                    903

28%

 Global Batteries and Appliances

                2,270

71%

 Global Pet Supplies

                    577

18%

 Home and Garden Business

                    355

11%

 Total

                3,202

100%

EBITDA

 Global Batteries & Appliances

                    312

68%

 Global Pet Supplies

                    106

23%

 Home and Garden Business

                      70

15%

 Total segments

                    488

106%

 Corporate expense

                    (27)

-6%

 Total EBITDA before any one times

                    460

100%

 

Batteries is a sub-segment of Global Batteries and Appliances.

VALUATION

I’m assuming 3% revenue growth in 2011 (in-line with mgmt guidance) and similar growth in the out-years. I’m keeping EBITDA margins roughly the same. Most cash is being used to pay down debt. Management’s objective is to get debt/ebitda below 3.0 by end of FY12.

The company has significant NOLs, however, I am having trouble determining exactly how to apply them and as such decided not to use them. Management guided to $50M in cash taxes this year, which I have in my model, but I couldn’t get to that number and still apply the NOLs. In any case the NOLs do not apply to non-US sales which are ~44% of the business. (Without using the NOLs I have FCF for 2011 that is slightly ahead of management guidance.)

[Modeling note: Q1’11 GAAP taxes were $35M, but cash taxes were only $11.

Management has also guided to ~$170 in cash interest and $40M capex. The $40M capex number they believe to be a sustaining number going forward, $10 of which is maintenance the rest is mostly new product development.

The pension is closed coming out of the bankruptcy and SPB is not responsible for future contributions. I have not included it in my EV.

Estimates:

2011

2012

2013

 Revenue

        3,202

        3,304

        3,403

 EBITDA

           460

           494

           506

 FCF

           176

           242

           260

 Debt

        1,633

        1,428

        1,194

 Debt paydown

          (200)

          (206)

          (234)

 Recent price

 $     28.00

 Shares

          50.8

          50.8

          50.8

 Market cap

        1,422

        1,422

        1,422

 Cash

           124

           160

           186

 Enterprise value

     2,931.9

     2,690.2

     2,429.9

 EV / EBITDA

6.4

5.5

4.8

 FCF yield to equity

12.4%

17.0%

18.3%

 Debt / EBITDA TTM

          3.55

          2.89

          2.36

 EBITDA TTM / cash interest

          2.85

          2.74

          3.09

 

At 7.5x ev/ebitda on 2011 and 2012 the stock would trade at $38 and $48 respectively. Helen of Troy (HELE) and Prestige Brands (PBH) trade at 7.7x and 9.5x, respectively, on FY11 based on CapIQ estimates.

CATALYSTS

Management continues to deliver slow, stable growth and continues to successfully integrate Russell Hobbs.  They continue to pay down debt on schedule. The market gets comfortable with the notion that Harbinger is a long-term holder.

 

Other: The investor relations rep is new, but very informative, though the CFO is accessible. Management plans to be on the road in NYC/Boston next week beginning to get the story out. They recently opened a Walmart buyer’s showroom in Bentonville. It is stocked with all their brands and those of their competitors. I have not yet been, but hope to go.

Catalyst

Management continues to deliver slow, stable growth and continues to successfully integrate Russell Hobbs.  They continue to pay down debt on schedule. The market gets comfortable with the notion that Harbinger is a long-term holder
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