Author Topic: SPB - Spectrum Brands  (Read 13315 times)

thepupil

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Re: SPG - Spectrum Brands
« Reply #40 on: October 07, 2019, 08:24:40 AM »
courtesy of JEF, I'm now an SPB shareholder.

Is this not stupid cheap? I don't really get it.

$4500 EV

$560mm guided EBITDA less $60mm capex = $500mm EBITDA-CAPEX = 500/4500 =11% to the enterprise value, mid teens to the equity. If we assume they blow out of their energizer at a 25% discount to the current price, that'd add another 50 bps of yield on the EV (500/4350) = 11.5%

I understand it's a diversified portfolio of also-rans and mediocre businesses, but doesn't that also reduce the risk of a huge negative inflection in earnings power?

For those that own this or looked at it but passed, what's the bear case? Is it simply that management has no credibility from past misdeeds and therefore the burden of proof is on them? Or have you been able to identify something more tangible?

Also, there shouldn't be a "discount for leverage" here. 3.5x with 5%-6% debt on its way to becoming 4% debt and 4-5x coverage seems very reasonable.
« Last Edit: October 07, 2019, 08:28:17 AM by thepupil »


Broeb22

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Re: SPG - Spectrum Brands
« Reply #41 on: October 07, 2019, 10:37:08 AM »
I agree that the market doesn't believe management right now.

There are perhaps a few other points bears would point to:

tariff sensitivity
new competition in duopolistic insecticide market (Spectracide) from P&G
lack of interest in the appliances business that they tried to sell but couldn't do at a respectable valuation (this anecdote kind of justifies a lower valuation for the whole portfolio in bears' minds)
CEO Maura distracted by his SPAC, Mosaic Acquisition, which is acquiring Vivint from Blackstone

kab60

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Re: SPG - Spectrum Brands
« Reply #42 on: October 07, 2019, 12:53:42 PM »
I run the numbers a bit differently thepupil and look at FCFE and thus you'll have to take into account interest and taxes. As for taxes, remember they have a billion of NOL's.

Broeb raised some valid issues, but I also agree it's cheap. If they return to growth next year, it should do well.

Here's some housekeeping items I got from IR recently;

Spectrum Brands has about $1 billion of usable NOLs that, barring any changes in the ability to use some of them, should enable the Company to not have to be a U.S. federal cash taxpayer for probably the next 5 years or possibly a bit longer, driven largely by the amount of U.S. federal pretax income annually.  The Company used to have nearly $1.2 billion of NOLs back in 2009-2010 and used them for many years in the same way.  Based on the current geographic composition of Spectrum Brands, our best guidance now is that you should estimate $40 to $50 million annually of cash taxes, predominantly non-U.S. and most driven by our very international Home & Personal Care business unit.

We decided not to guide on free cash flow in fiscal 2019 due to the complexity and difficulty of the numbers from having discontinued businesses for 4 months of the year.  It is likely the Company will resume free cash flow guidance for fiscal 2020 as it used to do for many years until the past year due to the asset divestitures.

As a rule of thumb, you should think about cap-x annually as about 2% of annual net sales, plus or minus, depending on the year.  Cash interest payments of over $200 million will likely come way down in fiscal 2020 due to significant paydown of high-cost debt earlier this year.  Perhaps $125 million or lower.

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So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).

And supposedly (but management has screwed up before) this should be during a transition year where they're investing margin to accelerate sales.

It's obviously cheap if they can be trusted, and the market doesn't seem to think so (and perhaps some technical selling now from Jefferies shareholders?).

I like what they've been doing though it was obviously a bummer that they couldn't sell the appliance business and now have to fix it. And looking at it in a historic perspective it has obviously been a crazy stupid strategy to buy a bunch of brands with no synergies and smack an expensive corporate layer on top. But something something about a puck and where it's going.

WneverLOSE

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Re: SPG - Spectrum Brands
« Reply #43 on: October 08, 2019, 01:29:58 AM »
....
So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).
....

Actually last FY they had ebitda of 355m, the 570m of their mid range guidance is "Adjusted ebitda" (bullshit earnings as charlie has called it in the past)

I unlike management think that Share based compensation is a real expense for example and it is a joke to call it anything else but an expense to shareholders.

Recalls are also an ongoing expense that is part of doing business, why should investors ignore it ? does GM investors overlook warranty expenses and recall costs ?

Restructuring is also an expense that is part of doing business (Buffett once said something of the like that Berkshire has been in restructuring since the day it began operating and companies can't survive without continuous change), while some of the cost they incurred in 2018 might be one time in nature I know that some of it is a real cost of doing business.

While I see the potential of SPB as an investment there is the question, will it materialize ?
I have seen a lot of companies with potential and 90% of the time there is a reason that all I saw is potential and not results, there is a reason why companies get to a state of "potential" and not to a state of market leading results.

« Last Edit: October 08, 2019, 01:33:40 AM by WneverLOSE »

kab60

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Re: SPG - Spectrum Brands
« Reply #44 on: October 08, 2019, 02:56:09 AM »
....
So 570m ebitda less 45m cash taxes, 125m interest, capex 62,5m = 337,5m FCF before WC or 14 pct. FCFE yield (this would be "normalised" 2019 numbers).
....

Actually last FY they had ebitda of 355m, the 570m of their mid range guidance is "Adjusted ebitda" (bullshit earnings as charlie has called it in the past)

I unlike management think that Share based compensation is a real expense for example and it is a joke to call it anything else but an expense to shareholders.

Recalls are also an ongoing expense that is part of doing business, why should investors ignore it ? does GM investors overlook warranty expenses and recall costs ?

Restructuring is also an expense that is part of doing business (Buffett once said something of the like that Berkshire has been in restructuring since the day it began operating and companies can't survive without continuous change), while some of the cost they incurred in 2018 might be one time in nature I know that some of it is a real cost of doing business.

While I see the potential of SPB as an investment there is the question, will it materialize ?
I have seen a lot of companies with potential and 90% of the time there is a reason that all I saw is potential and not results, there is a reason why companies get to a state of "potential" and not to a state of market leading results.
Fair point on SBC and recalls, I agree (and was being lazy with the numbers - also had the market cap higher so FCFE is probably a tad higher).

I think the restructuring point is somewhat meaningless here.

2018-2019 has been one major restructuring of the whole group including the merger with HRG Group, the sale of two divisions, one failed sale of a division and the extinguishment of a ton of debt.

Apart from a potentiel refi post 2020 guidance the heavy lifting should be done and focus should be on OPS (while leverage levels and maturity schedule are fine, they could probably shave off a meaningful amount of interest expense with a refi when the story is cleaned up - and capital markets are calm).

That's the question mark in my opinion; tariffs and execution.

kab60

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Re: SPG - Spectrum Brands
« Reply #45 on: November 13, 2019, 12:59:01 PM »
Strong set of results, despite the large pop I think it's probably a better risk/reward than before. They're executing very well but there should be room for a lot more OPS improvement considering the constant M&A that has been going on in prior years. Solid guidance despite 100m hit from tariffs and 100m restructuring, FCFE a bit low, but it is set up nicely for 2021 and beyond. Maura owes up to past mistakes, but jeeesh stuff must've been bad internally. Says all the right things and numbers seems to suggest they actually deliver.

Broeb22

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Re: SPG - Spectrum Brands
« Reply #46 on: November 13, 2019, 06:28:47 PM »
Where do you see FCF going in 2021? I had estimated that FCF would have been well north of $300 million, so $250 million doesnít make it seem screaming cheap.

I feel like Iím now betting on them performing operationally as well as Trump ending the trade war more than I am betting the stock is undervalued.

Part of me felt they kind of sandbagged guidance because they should be able to further reduce interest costs by refinancing (and executing well). Looking back at where I got things wrong, their pro forma interest costs are much higher than I anticipated because they didnít pay off their highest interest debt first. They paid off the term loan with a 4.4% interest rate instead of some debt north of 6%, but this higher cost debt should be refinanced over time.

kab60

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Re: SPG - Spectrum Brands
« Reply #47 on: November 13, 2019, 08:52:09 PM »
Where do you see FCF going in 2021? I had estimated that FCF would have been well north of $300 million, so $250 million doesnít make it seem screaming cheap.

I feel like Iím now betting on them performing operationally as well as Trump ending the trade war more than I am betting the stock is undervalued.

Part of me felt they kind of sandbagged guidance because they should be able to further reduce interest costs by refinancing (and executing well). Looking back at where I got things wrong, their pro forma interest costs are much higher than I anticipated because they didnít pay off their highest interest debt first. They paid off the term loan with a 4.4% interest rate instead of some debt north of 6%, but this higher cost debt should be refinanced over time.
I'm also negatively surprised by the interest expense, and it doesn't quiet square with the numbers I got from IR (I had runrate interest around 100-125m). The 250m FCF includes a large part of the cash restructuring (100m - hopefully this is the last, otherwise one has to consider it recurring), a 100m hit from tariffs and the use of less factoring. So hopefully those two first go away post 2020. It is a play on operationel improvement now, but their numbers suggest that's very possble, and if they can keep taking share and grow revenues, I don't think it should trade at these levels