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Spectrum Brands Holdings, Inc. - SPB Personal Products Spectrum Brands Holdings, Inc. - SPB Spectrum Brands Hlds – SPB Buy – Target: $150.00 Current Price: $117.77 Company Introduction: Spectrum Brands Holdings, Inc. offers a suite of global consumer products in ~160 countries. They sell batteries, appliances, door locks, plumbing and hardware parts, pet food and supplies, auto care products, insect and weed solutions. They recently sold their battery brands to Energizer for $2 billion in cash. Investment Thesis • Strategic sale of a low margin business for $2 billion in cash. • 24% short interest, high likelihood they are about to get squeezed. We believe the recent sale of their battery brands to Energizer is the start of a trend that will improve margins and growth rates. Their battery brands had some of the smallest growth rates in Spectrum’s suite of brand offerings, and management has stated that their intention is to use proceeds to improve leverage and pursue growth opportunities. The Start of the Opportunity: 60% of SPB is currently owned by HRG Group, Inc. (HRG). This has made SPB much more volatile and too risky for many investors. On December 17th & 19th, HRG issued two v letters to SPB proposing an integration of the two Source: Bloomberg, JWC Research corporate structures and a payment of $200 million Weekly Chart from SPB in exchange for the use of HRG’s net operating losses of $1.5 billion and additional board representation. SPB replied with minor tweaks to the payments and no additional board representation. On January 18, 2018, SPB postponed their shareholder meeting due to discussions with HRG “regarding a potential strategic transaction.” We believe a simplified structure is on its way with a lock up period for all parties. We also view the Energizer deal as the first indication of a “new” Spectrum Brands. We believe this will improve investor confidence. We also expect the 24.5% short interest to get squeezed as confidence is restored. Source: Stockcharts.com *Please see disclaimer at the end of this report. 2018 JWC Research. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying or by any information storage and retrieval system, without permission in writing from JWC Research. www.JWCResearch.com Page 1 February 1, 2018 This Report is limited solely for the use of clients of JWC Research – DO NOT Forward Personal Products Spectrum Brands Holdings, Inc. - SPB What is the JWC Confidence Score The JWC Confidence Score is an overweight/underweight scale designed to quickly give our clients key bullish and bearish points based on the JWC Research process - scoring the industry, operations, management team and valuation. The JWC Confidence Score utilizes 100 as a baseline score. The analyst then scores each segment of their analysis, decreasing it for bearish signs and increasing it for bullish signs. The graph shows a recap of this analysis with the company score being an average of the four sections. The JWC Confidence Score is continually monitored and updates are released based on any changes to the JWC Confidence Score. JWC Confidence Score JWC Confidence Score Industry: 100 Bull: Non-discretionary household products are generally defensive and we expect to see more e-commerce presence and global market growth opportunities. Bear: Retail sales have increasingly consolidated and the competition can be intense. Margins are often compressed for companies to remain competitive. Operations: 120 Bull: SPB’s various portfolio brands and geographic footprint provide diversification benefits to the business model. M&As can enhance long-term growth and margin expansion. Bear: The international operations overseas exposes the company to international business risk and currency fluctuations. Management: 120 Spectrum Brands Hlds – SPB 115 Bull: The leadership team focuses on transformative strategies to grow higher-margin Bull: SPB has a strong cash flow profile and businesses and selling less profitable divisions. business model poised to boost organic growth and margin expansion. They plan to use the cash Bear: As the business is investing heavily in from selling the battery brands to deleverage the operations abroad, it can be challenging for the company and position it for faster growth. leadership to manage and adapt to a rapidly changing market. Bear: The financial performance of the company relies heavily on a small number of key Valuation: 120 customers. It is important that SPB continues to Bull: The company has robust cash flow and develop its online presence to maintain a earnings per share over peers. In fiscal 2017, competitive position in the market. they refinanced to lower interest rate loans. Bear: Our valuation assumes strong free cash flow and management’s ability to control debt through the restructuring with HRG. www.JWCResearch.com Page 2 February 1, 2018 This Report is limited solely for the use of clients of JWC Research – DO NOT Forward Personal Products Spectrum Brands Holdings, Inc. - SPB Company Description Figure 1. SPB Brands Spectrum Brands Holdings, Inc. (NYSE: SPB), headquartered in Middleton, Wisconsin, is a diversified global branded consumer products company. The company manufactures, markets, and/or distributes its products in approximately 160 countries in North America, Europe, Middle East, Africa, Latin America and Asia-Pacific regions. They offer an expanding portfolio of leading brands providing superior value to consumers and customers every day (Figure 1). The five product segments they manage include: Global Batteries & Appliances, Hardware and Home Improvement, Global Pet Supplies, Home and Garden, and Global Auto Care. As of FY2017, the company has nearly 18,000 employees in 50 countries. Source: Company Presentation Industry Overview Figure 2. Online Penetration Retail Environment: The retail environment has drastically shifted in the consumer products industry. Manufacturers and marketers for the major consumer brands seek to maximize market appearance, brand name recognition and sales margin through a variety of trade channels and distribution networks. Retail sales of consumer products has increasingly consolidated on a worldwide basis into a small number of mass merchandisers and e-commerce companies that generally have strong negotiating power with their suppliers, such as Amazon and Walmart. Retailer inventories are generally believed to be much healthier as manufacturers have gone to a more on-demand mentality. We expect to see more online presence of consumer brands as e- commerce proves to be a bright spot (Figure 2), Source: Company Presentation for example, SPB’s online growth of over 50% in their core U.S. market. www.JWCResearch.com Page 3 February 1, 2018 This Report is limited solely for the use of clients of JWC Research – DO NOT Forward Personal Products Spectrum Brands Holdings, Inc. - SPB Industry Overview Figure 3. Net Sales by Segment (continued) Competitive Landscape: A portfolio of non- discretionary household product equities can be a defensive investment and helps to offset external headwinds during the economic downturn. The household products sub-industry remains very competitive, and the diversification of products is a key characteristic to satisfy a broad customer base. As consumer confidence continues to increase and inflation picks up, we expect to see growth and margin expansion opportunities across global markets. As branded companies and private labels compete in the relatively stable developed markets; pursuing mergers and acquisitions can further create growth, operational synergies and cut costs, Source: Company Presentation which helps to maintain top-line and bottom-line growth. Historically, the return on shareholder Figure 4. Geographic Footprint-FY2017 Net Sales equity for companies with the strongest brand portfolios has consistently been in double digits. Additionally, we expect to see rising demand of packaged products in emerging markets over the next few years. Source: Company Presentation Figure 5. Fiscal Year-end Deleverage History Source: Company Presentation www.JWCResearch.com Page 4 February 1, 2018 This Report is limited solely for the use of clients of JWC Research – DO NOT Forward Personal Products Spectrum Brands Holdings, Inc. - SPB A Quick Look at Operations Segments Distribution: Spectrum manages its International Operations: As a manufacturer business model in five vertically integrated, of largely non-discretionary, non-premium product-focused segments: Global Batteries & priced, home-related, replacement packaged Appliances, Hardware and Home Improvement, goods used by consumers daily, Spectrum’s Global Pet Supplies, Home and Garden, and global market leader position and international Global Auto Care (Figure 3). footprint provide diversification benefits to the • Batteries & Appliances – See below business and can help the company hedge • Hardware and Home Improvement market risk in one area against others. SPB’s division manufactures security hardware, operations spread around 160 countries and four such as locksets and door parts, plumbing regions: NA, EMEA, LATAM and APAC (Figure 4). and hardware products. Each operation segment distributes in at least • Pet Supplies is comprised of aquatics and two regions. We expect that Spectrum will companion animal products, which sell continue to grow internationally, especially in consumer and commercial aquarium kits Latin America, Europe and Asia. and equipment, as well as other specialty
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