When businesses and their managers make mistakes, one of two things happens. The business becomes less or totally unappealing because of deteriorating long-term trends, and the stock sinks; or, the business makes some errors that do not reflect the long-term viability of the company, and the stock sinks. The first option is unfortunate, while the second can be very attractive.
A conglomerate with a great portfolio of consumer products, The Harbinger Group (NYSE:HRG), has been victim of a two-pronged flub-up. Last May, the company's broadband start-up, LightSquared, entered into bankruptcy after it failed to achieve a favorable ruling from regulators. The company has a $3 billion position in LightSquared and is currently ushering it through bankruptcy. Then, Harbinger boss Phil Falcone was accused of using company funds to pay personal taxes and less-than-kosher practices in running his hedge fund. While all of it was certainly a no-no, it doesn't reflect the underlying strength in other parts of the company.
As the part owner of some incredible household brands and a valuable insurance operation, is this company an undervalued conglomerate?
Harbinger has its hand in many honeypots, but perhaps the most appealing is its 60% position in Spectrum Brands (NYSE:SPB). Though not itself a household name, Spectrum owns evergreen brands such as Stanley Black & Decker, Rayovac batteries, George Foreman, Faberware, and Remington.
The thing is, when one mentions Harbinger, it's typically in reference to Falcone's actions. While he could be considered a fundamental risk to the company, I believe the manager has made an effort to right his ways and move forward the best he can. More importantly, I believe his name has punished the company, which has not itself done anything unfavorable, besides the failed bet in LightSquared. The market, as usual, hasn't been able to separate the two in its valuation of the company. When you look at Harbinger compared with other conglomerates and consumer-product holding companies, it becomes clear that the market is down on the company.
For example, look at Fortune Brands Home and Security (NYSE:FBHS). I've written about FBHS in the past, and I've been a big fan of the company ever since its spin-off from Beam. While FBHS is a more concentrated play on housing and carries less risk than Harbinger (mainly because of LightSquared), it trades at a substantial premium. With a forward P/E of nearly 23 and an EV/EBITDA of 20.35, FBHS is far richer than Harbinger's 10.6 and 4.56, respectively.
The company's position in Spectrum Brands suggests substantial upside potential. Spectrum has been on a nearly vertical climb in the past 12 months, doubling in stock price based on the strong performance of its names, but it still trades at just 13.7 times forward earnings and has a trailing price-to-sales ratio of 0.87. FBHS trades at twice that figure -- 1.64.
More on LightSquared
What's keeping the company down, besides Falcone's history with the SEC, is LightSquared. By now, it's a failed company that still beleaguers Harbinger in that debtholders want to sue the company for a defaulted loan. Harbinger argued that LightSquared's spectrum holds much value and that its eventual sale will probably pay back those debtholders, eliminating the need of a lawsuit. In mid-February, Harbinger received a favorable ruling from a judge, allowing the company to retain exclusive control over LightSquared's restructuring.
The market seems fixated on this part of the company and ignores the fact that Spectrum Brands achieved record results and is probably headed even higher in the coming year. Harbinger's insurance divisions are performing as well, contributing solid results to the bottom line -- which was up 161% from the year-ago period based on a 5.2% increase in revenue.
Harbinger recapitalized debt with new senior notes at nearly 3 points lower than the previous terms. This lowers the company's cost of debt and extends debt maturity dates.
As the LightSquared debacle (hopefully) stabilizes in coming months, the market should turn to the company's other strong operating areas, and the stock price should correct in turn. Trading at a price-to-book value of less than 1, and a price-to-sales of just 0.27, Harbinger looks like a cheap business with strong prospects going forward.
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