Position Close Update: Spectrum Brand Holdings

Summary

• Spectrum Brand Holdings was originally selected as a Long Idea on 5/15/17.
• At the time the report, the stock received an Attractive rating.
• SPB has since been downgraded to Neutral on 2/9/18 after our Robo-Analyst parsed the most recent 10-Q.

Spectrum Brand Holdings (NYSE:SPB) – Closing Long Position – down 23% vs. S&P +16%

Spectrum Brand Holdings was originally selected as a Long Idea on 5/15/17. At the time the report, the stock received an Attractive rating. Our investment thesis highlighted consistent after-tax profit (NOPAT) growth, improving return on invested capital (ROIC), a focused effort to expand into higher margin segments, and a low PEBV ratio that implied immediate profit decline.

Despite the strong fundamentals and cheap valuation, SPB underperformed, falling 23% while the S&P rose 16% during the subsequent 288-day holding period. SPB has since been downgraded to Neutral on 2/9/18 after our Robo-Analyst parsed the most recent 10-Q. While SPB’s valuation remains attractive, the stock was downgraded due to a false positive trend in economic earnings vs. reported earnings.

Furthermore, it was announced on 2/26/18 that SPB would merge with its majority stockholder, HRG Group (HRG). The merger means investors no longer get exposure to SPB’s consumer goods segments without exposure to HRG’s other holdings. Due to the rating change and merger with HRG, we are closing this position.

Figure 1: SPB Stock Price and Risk/Reward Rating History

Sources: New Constructs, LLC and company filings

This article originally published on February 27, 2018.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[batman10023]

looks like the author got the last laugh here! good call. management just dropped the ball.. and might have lied.

[batman10023]

lazarus - lol.

dutchtender - look i can make a case for not going long SPB but the "exposed to other subsidaries of HRG" doesn't seem like real analysis.

for long term shareholders, having some uncertainty can be very positive if they use to proceeds from the various asset sales to buy back shares. what we need to see is the appliance sale executed - that will provide some comfort to the market.

[Dutchtender]

i am basically with you on that. maybe I did not phrase my comment correctly. but I feel like the position was sold by the author based on something other than fundamental analysis. and that is good for folks that understand the fundamentals here.

[Lazarus Advisors]

The AUM that follows that robo analyst used all the proceeds of their SPB sale to buy a Big Mac (not enough left over for fries or a soda).

[Dutchtender]

sometimes I like to remind myself that there are counter parties out there like this author...

[batman10023]

the stock will be at $125-135 at the end of the year in my view. and i see scenarios much higher.

[batman10023]

oh come on david. what other subdiaries are you talking about at HRG? it's now a holding company shell with the only real asset being SPB shares... (oh and a 1.6B NOL which is VERY attractive to SPB).

they sold the insurance business 6 months ago (FGL)

[batman10023]

got to love the guy who closes out after a 40% underperformance via the index.. painful.

the robo analyst and or real analyst didn't do a lick of work. HRG is just the majority owner of SPB shares. it's a NAV deal. basic basic stuff guy is missing.

also, SPB is selling some assets (batteries etc) and it's now part of discoutninued opps. so it screws up the valuation calcs for folks who just run screens.

thanks for the opportunity

[David Trainer]

We're closing this position this position due to the fact that it's no longer possible to get exposure just to SPB without having to also be exposed to the other subsidiaries of HRG whose businesses we don't like as much.

Also, we do make an adjustment for discontinued operations as part of our models. This is a position we likely would have kept open where it not for the HRG deal.