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Be Wary of Spectrum Brands Stock After the Coronavirus Market Meltdown

By Nicholas Rossolillo - May 6, 2020 at 8:10AM

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With a concerning amount of debt to manage and a restructuring to complete, this consumer products company could be a risky investment.

After rallying 52% last year because of progress in its restructuring following the sale of its battery and auto care businesses, Spectrum Brands (SPB 0.83%) stock reversed course in 2020 and is down more than 36% year to date and trading at a price almost exactly where it began 2019.

The company's diversified consumer goods portfolio did pretty well during the first three months of the year, and the ongoing stay-at-home mandates could benefit it -- as they have done for other consumer staple stocks. But when Spectrum delivered its latest quarterly results last week, investors were apparently not pleased that it also withdrew its financial guidance for the year due to the uncertainty generated by the coronavirus pandemic.

Spectrum's management thinks the company is in good shape to weather this financial storm and reiterated its intention to continue paying its dividend, which currently yields 3.9% a year. I agree that it's home, personal care, and pet brands should hold up well and even get a small boost amid the lockdown. But this is no growth stock and the company's debt remains elevated. Potential investors should tread lightly.  

A picture featuring Spectrum Brands' products: a Kwikset door lock, a Black & Decker kitchen scale, Dream Bone dog treat, and Spectacide lawn care.

Image source: Spectrum Brands.

Returning to sales growth

The good news from the report for Spectrum's fiscal second quarter, which ended March 29, was that total organic sales (excluding acquisitions and divestitures) increased by 4.1%. Revenue was $938 million, driven by a 5% increase in home and personal care (thanks to strong sales of Remington grooming products) and a 10.2% increase in the pet care segment. Those positives were offset by a 0.1% increase in its home and garden category and a 0.6% decline in hardware and home improvement related to supply chain disruption. Overall, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) grew 21.5% to $140 million.

In April, Spectrum said sales in certain segments -- especially pet care -- had been strong during the pandemic. However, weakness has started to show up in sales, and supply chain disruptions will be a factor as 2020 progresses. Management withdrew its guidance but said it expects results to be worse than the low-single-digit percentage revenue growth and 2% rise in adjusted EBITDA that it had previously forecast.  

Still, given the situation, things could be worse. Spectrum's broad range of products should do well while consumers are sheltering-in-place. It should be able to get its supply-chain issues largely sorted out, and a return to slow-but-steady sales growth could be in the cards for 2021.

Paring down on debt still key

My concern about Spectrum as an investment, though, is with its balance sheet. While the company did have $458 million in cash at the end of March, that was down from the $627 million at the end of September when it closed its fiscal 2019.

After restructuring to whittle down its obligations in 2018 and early 2019 with the sale of its Rayovac battery and ArmorAll auto care businesses to Energizer, its long-term debt is back up to $3 billion compared with $2.21 billion at the end of fiscal 2019. That was the result of the company drawing down its $800 million revolving credit facility as the coronavirus pandemic accelerated.

Over the last six months, the company spent $365 million repurchasing shares but has suspended further repurchases. Maintaining a stronger cash position and purchasing shares more opportunistically would have been a far better plan, especially now that the stock is back down to where it was at the start of 2019. The end result is looking like more interest payments will need to be planned for.  

Still, for those looking for a dividend, the 3.9% yield isn't bad and can easily be covered by profits (adjusted EBITDA of $243 million, a profit margin of 13.4% through the first half of fiscal 2020, compared with total dividends paid of $39.1 million). But with Spectrum's growth back in question this year and its restructuring still an ongoing project, I'd still be cautious about buying this consumer goods stock.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Spectrum Brands. The Motley Fool has a disclosure policy.

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