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Why Did Moody’s Rate Spectrum Brands’ Outlook as ‘Positive’?

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Price movement

Spectrum Brands (SPB) has a market cap of $7.8 billion. It fell by 1.5% to close at $130.41 per share on September 8, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -2.8%, -1.6%, and 29.0%, respectively, on the same day. SPB is trading 1.3% below its 20-day moving average, 4.1% above its 50-day moving average, and 18.8% above its 200-day moving average.

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Related ETF and peers

The iShares Morningstar Mid-Cap Growth Index ETF (JKH) invests 0.22% of its holdings in Spectrum Brands. The ETF tracks a market-cap-weighted index of mid-cap companies selected by Morningstar based on their growth characteristics. The YTD price movement of JKH was 5.5% on September 8.

The market cap of Spectrum Brands’ competitors are as follows:

  • Procter & Gamble (PG) — $234.6 billion
  • Edgewell Personal Care (EPC) — $4.6 billion
  • Masco (MAS) — $11.6 billion

Latest news on SPB

In a press release on September 8, 2016, Moody’s reported that it had “revised Spectrum Brands, Inc. (‘Spectrum’ or ‘Spectrum Brands’) rating outlook to positive from stable due to Spectrum’s improved operating performance and Moody’s expectation of further improvement.” It added that “the senior secured credit facility was upgraded to Ba1 from Ba2 and the speculative grade liquidity rating was upgraded to SGL 1 from SGL 2.”

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It also stated that “the upgrade in the liquidity rating reflects Spectrum’s improving free cash flow generation and strong cash balances. Moody’s expects Spectrum to generate over $500 million in free cash flow. The upgrade in the secured credit facility reflects a shift in the proportional loss absorption between the secured and the unsecured debt obligations due to prepayments and amortization of the term loan.”

Performance of Spectrum Brands in fiscal 3Q16

Spectrum Brands reported fiscal 3Q16 net sales of $1.4 million, a rise of 9.1% from the net sales of $1.3 million in fiscal 3Q15. Sales from the Global Batteries & Appliances and Global Pet Supplies segments fell by 1.1% and 0.6%, respectively. Sales from the Hardware & Home Improvement, Home & Garden, and Global Auto Care segments rose by 4.8%, 4.8%, and 148.1%, respectively, between fiscals 3Q15 and 3Q16. The company’s gross profit margin and operating income rose by 6.2% and 52.3%, respectively.

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EPS and cash

The company’s net income and EPS (earnings per share) rose to $101.9 million and $1.71, respectively, in fiscal 3Q16, compared with $44.9 million and $0.79, respectively, in fiscal 3Q15. It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $279.2 million in fiscal 3Q16, a rise of 18.2% over fiscal 3Q15. SPB’s cash and cash equivalents fell by 52.8% and its inventory rose by 7.9% between fiscals 4Q15 and 3Q16.

Projections

The company has made the following projections for fiscal 2016:

  • net sales increase in the high single-digit range (including the positive impacts of the acquisitions of the European pet food business on December 31, 2014, Salix Animal Health on January 16, 2015, and Armored Auto Group on May 21, 2015, and the negative impact of foreign exchange of ~2.8%–3.0% based on current spot rates)
  • free cash flows in the range of $505 million–$515 million
  • capital expenditures in the range of $100 million–$110 million

In the next part, we’ll take a look at Tyson Foods (TSN).

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