Seeking Alpha: Spectrum Brands Has The FCF Juice, But Valuation Is Trickier

Debt-fueled acquisition stories often have unhappy endings, and Spectrum Brands (SPB) has already gotten itself into trouble before. That was then, though, and the company's mix of consumer products (many of which are positioned as leading value brands) has been generating better free cash flow of late. Add in some leverage to the housing recovery through the acquisition of Stanley Black & Decker's (SWK) HHI segment and this is a more interesting story than it was even just a year ago.

It's not a story without some risks. The company has an especially high debt load, and the ownership/intentions of Harbinger Group (HRG) adds an element of uncertainty not present at companies like Jarden (JAH) or Helen of Troy (HELE). Moreover, I wouldn't rule out the risk of Spectrum's brands getting squeezed between consumers still willing (and able) to pay up for the premium brands and those consumers who turn to even cheaper private label or imported brands. Valuation is likewise a tricky matter, as the shares trade above past norms and only look cheap on a cash flow basis if you ignore the large debt load.

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Spectrum Brands Has The FCF Juice, But Valuation Is Trickier

Investopedia: Bulls And Bears Still Battling For Helen Of Troy

It's pure coincidence that I just finished reading through The Iliad earlier this week; the ancient story of the Greeks fighting the Trojans after the kidnapping of Helen. There are undeniable similarities with the battle for the fictional Helen and the back-and-forth with Helen Of Troy (Nasdaq:HELE) and the market. While I seriously doubt that Athena and Poseidon are taking a personal interest in the stock market and influencing traders, the advances and declines in this stock do seem to resemble the ebb and flow of that legendary battle.

A Tougher Second Quarter  

Helen of Troy reported that sales rose almost 59% this quarter, but that figure was greatly boosted by the acquisition of Kaz and it came in close to 5% below the average analyst estimate. The personal care and healthcare/home businesses were disappointing; personal care was down 2% and the healthcare/home was down about 1% on a pro forma basis. Consequently, the 14.6% growth in the smaller housewares business was largely for naught. All in all, adjusted revenue growth this quarter was just 2% and that's not enough.

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Another Great Deal For Helen Of Troy

I have followed and written about consumer products company Helen of Troy (Nasdaq:HELE) for a long time, and yet I still find myself surprised at how the company operates. Simply put, this company just has a knack for finding attractive deals and pulling the trigger - common sense would dictate that other would-be rivals would look around and see the same business conditions and compete against these accretive opportunities for Helen of Troy. 

The Latest
Helen of Troy's stock spiked on Thursday on the company's announcement that it would be buying consumer products company Kaz for $260 million - a purchase that the company will fund largely out of debt. A privately-held company, Kaz sells a wide range of products in the personal care and houseware space, including air purifiers, fans, thermometers and humidifiers. Although the company has some of its own brands, a lot of Kaz's sales come from licensed brands like Vicks and Braun [both from Procter & Gamble (NYSE:PG)] and Honeywell (NYSE:HON). That is almost a perfect match for how HELE operates, and the two companies should fit together exceptionally well.

Solid Financial Reasons For The Deal
According to HELE, Kaz is on track to produce about $400 million in sales. That suggests an exceptionally good valuation on the deal, though on a price-sales basis, it is not much different than the valuations on companies like Newell Rubbermaid (NYSE:NWL), Jarden (NYSE:JAH) or Lifetime Brands (Nasdaq:LCUT). What is interesting about that comparison, though, is that all of those companies also have rather low returns on capital. That raises the question of just how well-run Kaz is and if HELE is buying a problem. (For related reading, check out How To Use Price-To-Sales Ratios To Value Stocks.)

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