Batteries and pet food are common purchases you make every month without even realizing. Consumer products like these are non-discretionary and need to be replaced frequently. This contributes to the strong free cash flow and profitability of Spectrum Brands Holdings, Inc. (NYSE:SPB), a global consumer products company selling consumer batteries, small appliances, and pet supplies among other products.
Unfortunately, while I like its business, its capital management practices leave much to be desired, especially its weak balance sheet. It is also expensive at 1.9 times PEG and I will not recommend that investors buy into the stock now.
I love consumer products, just like Warren Buffett
Why do I like branded consumer products companies like Spectrum Brands Holdings, Inc. (NYSE:SPB)? Firstly, the consumer products that Spectrum Brands Holdings, Inc. (NYSE:SPB) sells are not priced at a premium and make up a relatively small proportion of a consumer’s budget. In times of economic stress, Spectrum Brands Holdings, Inc. (NYSE:SPB) is not affected by the cut in big ticket items, since the cost of batteries and personal appliances is small compared with furniture and freezers. Spectrum Brands Holdings, Inc. (NYSE:SPB) also benefits from consumers downgrading to cheaper goods, as it has always positioned its products as ‘same for less” — cheaper alternative products with similar performance attributes.
Secondly, these products are non-discretionary in nature. Consumers are unlikely to starve their pets or stop replacing batteries. In addition, Spectrum Brands Holdings, Inc. (NYSE:SPB) also sells batteries for hearing aids and other medical instruments, for which the continued operation of medical devices is critical.
Last but not the least, most of Spectrum Brands’ products such as insecticides are consumables need to be replaced frequently. As a result, demand for Spectrum Brands’ products remains relatively constant, given the short replacement life cycle of most of its products.
But capital management practices fail to impress
Since Spectrum Brands emerged from bankruptcy in October 2009, which was a result of aggressive acquisitions and a huge debt load, it has delivered positive free cash flow and profitability for the past four fiscal years. It also initiated regular quarterly dividends of $0.25 per share beginning in fiscal 2013. However, it seems that it has not learned from its previous mistakes.
Spectrum Brands’ credit ratios raise warning bells. It is highly leveraged with a gross debt-to-equity ratio of 346%. Current ratio is decent at 2:1, but quick ratio, a more stringent measure of short-term liquidity, is below 1.