Undervalued Spectrum Brands Moves Higher After Upgrade

Spectrum Brands A Diversified Play On Consumer Strength 

Spectrum Brands (NYSE: SPB) may be the best-positioned of all the consumer staples stocks and there are quite a few good ones to pick from. The company’s host of brands includes things like Kwikset, Black&Decker, George Forman, Eukanuba, Spectracide, and Black Flag; Its products are found in the hardware store to the grocery store and nearly every store in between; and the trends supporting it include stay-at-home/work-at-home, nesting, housing/home improvement, pets/pet care, and lawn & garden. Along with that is a value compared to the broad market and peers as well as an attractive dividend we think this stock could move up 20% to 30% by the end of the year.  

The Analysts Warm Up To Spectrum Brands 

The analysts are warming up to Spectrum Brands but their consensus target is still lagging the price action. The average rating is a buy and has been getting steadily stronger over the past three months. The latest nod comes from Oppenheimer which maintained a buy rating but raised its price target to $100 or 11% upside from the current price action. Oppenheimer calls the stock a post-pandemic winner and one that will see modest mid-single-digit growth over the long-term that outpaces the consumer staples group. 

"The company emphasized it is well-positioned to outpace category growth, even as COVID-19 ends. Long-term underlying growth could reach 4–6%, vs. category growth of 3–4%, owing to sticky demand and the benefit of increased investments (e.g., advertising, promotion, and product development). Further, when these are combined with improved retailer relationships and pricing, SPB could begin to offset a portion of the inflationary headwinds,” says analyst Ian Zaffino.

The $100 price target at Oppenheimer is not the Wall Street high. The high price target of $105 is held by Wells Fargo and set only a week earlier. The consensus of the four most recent and most current analysts calls is in the range of $103.00 which adds another few points of potential upside to the stock. 

The analysts are expecting the company to post a fairly decent quarter for the fiscal Q2 period, slated to be released May 6th. Revenue is expected to decline sequentially but grow 10% YOY with a comparable increase in earnings. Based on the strength in earnings we’ve been seeing, and the slow pace of revisions for this company, we believe the sequential comp will be much better than expected and drive YOY earnings into the mid-teens and above consensus. 

Spectrum Brands Dividend Is Stable 

Spectrum Brands has some history of distribution increase but we don’t think investors should hold their breath waiting for the next one. It’s been a few years since the last and the FCF is a little tight paying for debt. That said, we don’t expect to see this company cut or decrease its payment and we do expect to see debt come down over the coming year. The bottom line, the 1.90% beats the broad market by 60 basis points, it’s safe, and when coupled with the low 15X earnings it is trading for, cheap to buy. 

Shares of SPB are moving higher in the wake of the upgrade for more than one reason. Among them are the company’s value, its yield, and outlook for earnings as well as its position for the post-pandemic environment. Price action is up more than 3.0% and breaking out to a new three year high which suggests momentum will carry this stock higher for the near-term at least. A move above $93 would be very bullish and likely lead the stock up to $100 before the earnings report is released.