This has been a year of twists and turns for Spectrum Brands (SPB +1.59%). The diversified consumer goods company has struggled recently with stagnant sales and falling profits, which led management to the (correct) conclusion that bigger isn't always better. With its fiscal 2019 in the books and the company embarking on its fiscal 2020 significantly lighter than before, investors may be wondering if the stock is a buy.
The year in review
For starters, let's acknowledge that even after a rally of 46% so far in 2019, with just two weeks left to go in the year as I write, Spectrum is still some 50% below the 21st-century high it hit back in 2017. A superficial look might suggest that the company is still a solid investment, and in some ways it is. In its fiscal Q4 report, management revealed it had authorized a new $250 million share repurchase plan. That's about 8% of Spectrum's current market cap of $3.1 billion, and decreasing the share count should give a nice boost to EPS. It's also not a bad return of cash to shareholders when paired with a dividend that currently yields 2.7%.
Spectrum's balance sheet also looks far better now than it has in years past, thanks in large part to the sale of its Rayovac battery business (for $2 billion in cash) and its Armor All auto care and STP motor oil businesses (for $939 million in cash and 5.3 million in acquired shares) to Energizer Holdings in a set of deals that wrapped up in January. Spectrum's total debt net of cash on the balance sheet was $1.72 billion at the end of fiscal 2019, compared with $4.10 billion a year prior. Interest rates on the debt remaining have also been lowered, with $300 million of new 10-year duration notes at 5% interest replacing old ones carrying a 6.625% rate. All good stuff.
Image source: Spectrum Brands.
However, the businesses that remain under Spectrum's umbrella aren't going to break any expansion records anytime soon. After all, home improvement & hardware and lawn & garden care (where it holds brands like Kwikset, Pfister, and Spectracide) are not high-growth industries. Nor are home & personal care (Black & Decker, Remington, and George Foreman), or pet care (DreamBone, FURminator).
That truth is reflected in last year's numbers. Organic sales (excluding foreign currency exchange impacts) in these four segments combined grew just 1.4%, leading to a slight drop in revenue and profits.
|
Metric |
Fiscal 2019 |
Fiscal 2018 |
Change |
|---|---|---|---|
|
Revenue |
$3.80 billion |
$3.81 billion |
~0% |
|
Cost of sales |
$2.49 billion |
$2.47 billion |
1% |
|
Operating expenses |
$1.23 billion |
$1.11 billion |
11% |
|
Net income |
$469 million |
$872 million |
(46%) |
|
Adjusted earnings per share from continuing operations |
$2.86 |
$3.47 |
(18%) |
Data source: Spectrum Brands. Company's fiscal years end Sept. 30.
Better days are ahead
Here's the good news: Though the overall 2019 results were nothing to write home about, Spectrum exited the fiscal year with a 2% revenue increase in Q4. Its remaining home and personal care businesses are forecast to all grow in 2020, which is expected to result in low single-digit-percentage revenue growth overall. To bring its expense structure into alignment with the new, smaller scope of operations, Spectrum also began a cost-cutting plan that it thinks will deliver $100 million in savings over the next two years. Those savings will be reinvested back into its brand portfolio with the goal of stimulating some much-needed organic growth.
Given all that, Spectrum Brands' forward P/E ratio of 15 makes this stock look like a reasonable buy. (For comparison, the S&P 500 trades for 19.3 times forward earnings estimates.) The 2.7%-yielding dividend and robust share-repurchase program aren't bad add-ons either. However, this is a slow-growing company, and a lot is riding on management's ability to shave expenses and boost revenues. After the big rally in share price this year, much of the optimism is already priced in.
