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SPB - A Miss, But Some Good with Not So Good

SPB reported Q2 EPS of $0.44, $0.08 below consensus.  The stock is not well-followed or particularly well-modeled, but the results are still likely below expectations.  More important than the EPS result, in our view, was that the company maintained its FCF guidance (the basis of the story is in an accelerating free cash flow profile) and continues to believe that it can delever its balance sheet by over $200 million in 2H.  With leverage to one of our key macro themes (housing) in the form of its newly acquired hardware and home improvement business and guidance of approximately $4.50 per share in FCF in ’13, SPB is an interesting story in a sector without a lot of interesting stories.



If this name were to be weak tomorrow (below $55), we would be buyers.  The name isn’t for everyone, admittedly – it trades by appointment and long/short investors would likely get frustrated having to hedge it out.  However, in terms of potential upside, we think it is definitely worth doing more work on the name.



What we liked:

  • Remains on pace for $240 million of FCF in ‘13
  • Still on track to delever balance sheet by $200 million in 2H
  • Good quarter in Global Pet Supplies - +3.3% constant currency growth
  • Newly acquired Hardware and Home Improvement business was +10.6% year over year top line

What we didn’t like:

  • Going through the press release and updating the model – tighten it up, people
  • EPS missed consensus, but that is not the meat of the story
  • Sales in just about every segment were down (but for the pro forma results in Home and Hardware and Global Pet Supplies) with total firm constant currency organic revenue declining 1.5%
  • Global Batteries declined 1.8% and the commentary indicated that the company gained share in North America – with consensus modeling just a 1% top line decline in ENR you can probably rest a touch easier tonight before tomorrow’s EPS result
  • Home and Garden declined 7.0%, confirming what we suspect (and is likely widely known) will be a weak quarter at SMG.  At $42, we suspect lighter results were largely priced in at SMG, at $45, we are a little less sure.  Also, SPB management specifically pointed out that the company does not participate in the fertilizer, seed or mulch big business – may have been to clarify, or may have been a sign those categories were weaker overall.

Bottom line, keep this one on your radar screens and be a buyer on material weakness.

 

Call with questions,

 

Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst