Spectrum Brands: '1-Pager' Summary

Spectrum Brands (NYSE: SPB $83.12) MV = $3.4bln; PF EV = $3.2bln; 3mo ADV = 0.29mm shares             

Trades @ 6.7x 2023E EBITDA; 15x 2023E FCF; Net Leverage Ratio (2021 EBITDA) = Net Cash

Blended Target Price: $119 or 43% Upside

Author: Philippe Kurzweil | pjsubstack@gmail.com                                                  

Date: 7/6/2022

Disclaimer: I own common shares in SPB. Please do your own work.

LINK TO FULL WRITEUP HERE

Background: A trimmed down consumer staples company, Spectrum Brands (ticker: SPB) is completing its transformation into a higher margin, more agile consumables business with a clean balance sheet. Yet despite improving organic growth and execution, pro-forma (PF) for the sale of its Hardware & Home Improvement business (HHI), SPB trades at 6.7x ’23 EBITDA, well below peers. PF for the sale of its Hardware & Home Improvement (HHI) and separation of its Home & Personal Care (HPC) businesses, SPB’s revenue split will be 65% Global Pet Care (GPC) and 35% Home & Garden (H&G). Global Pet Care (GPC) growth drivers include secular increases in pet ownership and rising spend per pet household. Drivers for Home & Garden (H&G) include the shift to more outdoor/garden activity and the secular migration from blue to red states (longer growing/outdoor season). In addition, both segments benefit from increasing millennial homeownership: millennials tend to spend more per month on their pets versus other cohorts and, per The Scotts Miracle Gro Co (ticker: SMG), spend more on ‘controls’ (weed/insect control), the key vertical for H&G, when compared to Boomers

Financial Profile: PF SPB has changed dramatically from its incarnation in the late 2010s, when it was overlevered and mismanaged. Today’s SPB features a net cash balance sheet with the combination of Global Pet Care (GPC) and Home & Garden (H&G) driving 3-4% organic growth and 17-18% EBITDA margins. With limited capex needs (~2% of revenues) and the desire to purchase substantial stock, we see SPB (PF for the HHI divestiture) trading at 10x EV/’24 unlevered Free Cash Flow (FCF), which compares favorably to its closest peer Central Garden & Pet (ticker: CENT), which trades at 20x EV/’24 unlevered FCF.

Management: Chairman/CEO David Maura has been involved with SPB for the last decade. A HY analyst by training, Maura has proven adept at portfolio management but is less of an operator. COO Randy Lewis is the de facto operating CEO who has been with SPB since ’05 and started his career at Unilever. He is broadly regarded as a strong operator and knows both the GPC and H&G businesses extremely well. Maura is the beneficial owner of ~653K shares or 1.5% of S/O. Incentive comp based on Adj. EBITDA, Adj. FCF and Adj. ROE.

What’s To Like? Post HHI sale and HPC separation, the ‘new’ SPB will have a net cash balance sheet and two remaining businesses with strong market positions, recognizable brands, and additional M&A opportunities. Historically, home/garden and pet expenditure has fared reasonably well during recessions – both businesses benefit from the fact that 90% of their combined products are ‘consumables.’ Precedent transaction and peer multiples suggest that H&G and GPC both deserve double digit EBITDA multiples; the board/management believes the stock is cheap and will deploy a significant amount of cash into share repos, which will lead to positive revisions on Consensus ‘per share’ estimates. Ultimately, we think the portfolio and balance sheet simplification along with enhanced shareholder returns will bring more buy and sell-side analysts to the stock.

Why Are We Getting This Opportunity? Investors have reservations that a) the HHI deal won’t close, b) the HPC separation won’t happen, c) the businesses had an unsustainable COVID bump and d) management cannot execute. In our view, a) HHI has multiple interested suitors should the deal hit a significant antitrust snag, b) SPB has options within its control to separate HPC including a spin, c) GPC and H&G will both benefit from secular trends that have been accelerated by COVID and d) management has shown an ability to ‘under promise’ and ‘over deliver’ on their ‘Global Productivity Improvement Plan.’

What’s It Worth? On EV/EBITDA basis, our base case yields $134 (+61%); an upside case justifies a $164 stock (+97%). Downside/recession scenario using lower multiples on lower earnings yields $67 (-20%). Assuming our downside/base/upside cases have 40%/20%/40% probability, we obtain a $119/share PT or 43% upside.

What Are The Catalysts? Near-term update on HHI deal and post-closing, significant debt paydown and share repo activity. SPB provides carveout financials for HPC as a precedent to selling/spinning/merging it with another entity. Longer-term, SPB should merge with Central Garden & Pet (ticker: CENT) – they have complementary businesses, CENT’s chairman/controlling shareholder is 81 and SPB previously tried to acquire CENT in 2014.

Appendix: Base Case Model

Appendix: Scenario Inputs

Appendix: SOTP Analysis By Scenario

Appendix: Comps