Investment icon Peter Lynch's book One Up on Wall Street uses the term "deworseification" to describe companies that lose their core focus by diversifying in an attempt to ignite growth. The fourth-quarter results from Spectrum Brands
This multifaceted juggernaut makes Rayovac batteries, Remington shavers, and grooming products. In the past year, it's also added or expanded offerings in insecticides, lawn and garden care, and pet supplies with a $1.2 billion purchase of United Industries and a 415-million-euro acquisition of Tetra.
In early September, the company warned that it would miss analysts' expected pro forma earnings of $0.36 a share, instead coming in between $0.10 and $0.15 a share. Given this information, you'd think analysts could predict revenues with reasonable accuracy. You'd be wrong.
On average, analysts expected $625.4 million in revenue, with the lowest predicting $613 million. Instead, Spectrum quietly turned in $603.7 million. Revenue was down 8.9% year over year, net of the effect of the company's acquisitions.
As warned, the North American battery business stunk up the quarter. Operating profits fell 59.2% to $18.4 million. The company cited high retail inventory levels, increased raw materials and energy costs, lower margins associated with the United business, and various restructuring charges related to the United integration.
Current owners, beware: Operating income for the quarter was $34.1 million, while interest expense totaled $39.5 million. That's not good, though that figure does include $37.2 million in inventory charges for the United and Tetra acquisitions. Since the company remains acquisition-minded, investors should monitor future quarters to make sure that operating income is covering interest expense by a healthy margin. Full-year interest coverage came in at less than two times, another unimpressive year-over-year number, and another item worth watching closely.
The core battery business is hurting, yet the company is buying companies left and right. There's no full balance sheet to go by, but that behavior would seem to contribute perilously to Spectrum's debt burden -- and lower its margins to boot. That's deworseification in my book, though some might suggest it removes a degree of cyclicality. To its credit, the company still holds strong relationships with big retailers such as Wal-Mart
On a GAAP basis, the company expects to earn between $1.87 and $1.92 per share in fiscal 2006 (ending next September). That's a big jump from 2005's $1.07, but up just 13.8% from 2004. The company also predicts a forward earnings multiple of 9.5, at the low end of expectations. For comparison, competitor Energizer
Spectrum is one of the largest percentage losers on the NYSE today, down 12%. In addition to setting a new 52-week low, it's trading for prices it hasn't seen since 2003. There's still a chance for recovery -- but only if the company can bounce back to earn that $1.90 per share in the next fiscal year.
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