Wednesday, February 6, 2013

Spectrum Brands (SPB) – Post Bankruptcy play with substantial upsisde

Those looking into some catalyst might want to ponder over this name for the week. I looked at this name and read it in Barron's. It was Meryl Witmer’s pick. This def. is worth a serious look.

Current Price: $55.60

Market Cap:

Shares outstanding: 53m

How high could the stock go? Two-year price target is $75 to $100.

Spectrum emerged from bankruptcy protection in 2009. It is 57.7%-owned by Harbinger Group [HRG], which is controlled by Harbinger Holdings, a private investment firm run by Phil Falcone. Spectrum represents the majority of the value of Harbinger Group. Falcone is controversial, and Harbinger's ownership stake could explain why Spectrum is a good value. Harbinger might have to sell its Spectrum shares at some point. If a forced sale were to occur, it might remove the taint from Spectrum, and bring it more attention.

Business: Spectrum is a diversified seller of branded consumer products. Its brands include Rayovac and Varta batteries; it is No. 3 in the business in North America, and No. 1 in Latin America. It also sells Remington electric razors and personal-care products, and is No. 2 in the category in North America, the U.K., and Australia. In small kitchen appliances, with brands such as Farberware, Black & Decker, George Foreman, and Russell Hobbs, it is No. 2 in the U.S. and No. 1 in the U.K. Spectrum also is active in pet supplies; its brands include Tetra, FURminator, Nature's Miracle, and Dingo. It is No. 1 in fish supplies, No. 2 in global pet supplies. In the home-and-garden segment, it sells insect repellants, and is No. 2 in the U.S.

Key points:
A key consideration  is the quality of the management team, and its focus on allocating capital wisely. Spectrum recently completed an acquisition that may turn out to be brilliant. It bought a division of Stanley Black & Decker (SWK), whose brands include Kwikset, Weiser, and Baldwin doorknobs and locks. It is No. 1 in locks in the U.S. and Canada, and No. 1 in luxury hardware in the U.S. Other brands include Stanley hardware, No. 1 with residential builders in the U.S., and Pfister faucets, No. 4 in the U.S. The benefits from this acquisition are twofold. Spectrum has a fantastic global distribution system and, over time, can introduce the Stanley Black & Decker products worldwide. Also, it will gain increased scale with customers.

Financial impact From M&A
: If the only benefit of the merger is the $10 million in cost savings that management outlined, and there is no growth, reported earnings per share would climb from an estimated $3.64 in 2013 to $4.20 in 2015, mainly from paying down debt. To square GAAP accounting , we add back incremental cash flow of 80 cents a share from NOLs [net operating-loss carry forwards, a deferred-tax asset]. That's $5 a share in after-tax free cash. The excess of depreciation and amortization over capital spending adds another $2 in cash. In all, after-tax free cash flow grows from an estimated $6.44 a share in 2013 to $7 in 2015. The stock is a real bargain at 7x after-tax free cash.

A few things could happen to boost earnings. Spectrum could continue to grow at a 4% annual rate, which would add another 80 cents to earnings over two years. In 2014, it could refinance some expensive debt on which it is paying 9.5% at, say, 6%, which would save another 65 cents a share. Add it up and you get $8.45 a share. Plus, the company has NOLs of more than $1 billion. And these numbers don't include the benefits of broader distribution of the Stanley Black & Decker brands, or a significant increase in homes built in the U.S., which we expect.

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