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Spectrum Brands Rallies 37% YTD: What's Aiding the Stock?

Zacks Equity Research

Spectrum Brands Holdings, Inc. SPB is gaining momentum on the back of its strategic initiatives including mergers, acquisitions and divestitures, and brand strength. In a bid to capture growth opportunities, the company is conducting a thorough analysis of its global operating model. Also, management has successfully implemented value-creating initiatives to accelerate the transition toward a stronger and focused consumer products company.

Driven by these positives, shares of this Zacks Rank #3 (Hold) stock has gained 37.2% on a year-to-date basis, outperforming the industry’s meager growth of 0.9%.

Let’s Delve Deep

Spectrum Brands has been undertaking various strategic measures to drive growth across its business. Evidently, the company announced a five-year partnership with Manchester United plc, following which its Remington personal care brand will be the Manchester Football Club’s foremost official Electrical Styling Partner. Backed by this deal, Spectrum Brands is expected to strengthen its Home & Personal Care segment besides making product innovation and marketing efforts.

In January this year, the company has completed the divestitures of its Global Auto Care Business, and Global Battery and Lighting Businesses to Energizer Holdings, Inc. ENR for total gross sale proceeds of roughly $2.9 billion and 5.3 million shares of the Energizer’s common stock. Spectrum Brands used these proceeds to repay debt of about $2.40 billion and returned $250 million to its shareholders through share buybacks. In fact, the company remains focused on strengthening its balance sheet by paying down debt.

At the end of second-quarter fiscal 2019, the company achieved net leverage of about 3.9x, courtesy of the above-mentioned growth efforts. Currently, it is on track to accomplish a leverage target of roughly 3.5x by the end of the fiscal year. Management expects to distribute roughly $86 million to its shareholders through dividends in the same period. Furthermore, Spectrum Brands had an authorization worth of up to $750 million remaining under its current three-year share repurchase program. These measures are expected to enhance the company’s liquidity position and financial flexibility.

Apart from these factors, Spectrum Brands is one of the leading suppliers of plumbing, shaving and grooming products, personal care products, small household appliances, lawn and garden and home pest control products, repellents, and pet supplies. Additionally, the company is set to concentrate on the development of its four key business segments.

Spectrum Brands’s robust sales performance in second-quarter fiscal 2019 is an added positive. Net sales increased 2.7% year over year, thanks to the company’s solid sales growth in the Home & Garden and Hardware & Home Improvement divisions. At the Home & Garden segment, sales were mainly driven by a double-digit rise in outdoor control category revenues. Meanwhile, sales in the Hardware & Home Improvement segment rose mainly due to growth in U.S. residential security, plumbing and builders’ hardware. In addition, the company’s overall organic net sales grew 4.9% in the fiscal second quarter driven by organic sales improvement in all the segments. For fiscal 2019, net sales are expected to grow year over year backed by pricing, innovations, higher marketing investments and solid market share gains.

However, Spectrum Brands delivered a third straight earnings miss in the fiscal second quarter. The bottom line also declined 46.9% in the reported quarter due to higher Spectrum Brands delivered third straight earnings miss in the fiscal operating expenses stemming from increased stock-based compensation and interest expenses from assumed HRG debt. Additionally, lower volumes, input cost inflation, unfavorable product mix and higher operating expenses have been hurting the company’s EBITDA.

Moving ahead, we expect the company’s growth endeavors to offset these hurdles. Further, Spectrum Brands’ long-term expected earnings growth rate of 8.1% and a VGM Score of B are encouraging.

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