market folly

This week's focus stock is Spectrum Brands (SPB) and the article takes a look potentially at why Phil Falcone's hedge fund Harbinger Capital Partners has established such a large position. Previous write-ups include: why Maverick Capital owns Amdocs and why George Soros owns Comverse Technology.


The following is written by Tsachy Mishal, portfolio manager at TAM Capital Management.

The subject of billionaire hedge fund manager Philip Falcone elicits strong feelings. He is best known for his big bet on Lightsquared but lesser known for his other big bet: Spectrum Brands (SPB). Phil Falcone controls over 50% of the $1.65 billion company.

Spectrum Brands is a roll-up of many consumer brands such as Rayovac batteries, Remington shavers, Hot Shot bug killer, Tetra fish food and many more. The largest chunk of the profits comes from the batteries division. Spectrum Brands has had good momentum versus its peers as their discount brands tend to gain market share during difficult economic times.

SPB has a $3.35 billion enterprise value and a $1.65 billion market cap. On an enterprise value to EBIDTA basis, Spectrum Brands trades at an 11% discount to peers based on 2013 expectations. This does not even take into consideration the $1.2 billion net operating loss carry forwards (NOLs) they hold.

What I Like:

- Spectrum's stock has 23% upside before trading at the valuation of its peers, even ignoring the NOL's.
- The businesses have positive momentum and are gaining share. Consumers are likely to continue shifting towards lower price brands.
- Spectrum Brands has a greater than 12% free cash flow yield based on 2012 expectations.
- The controlling shareholder seems to have his incentives aligned with the best interests of other shareholders.


What I Don't Like:

- The company is carrying a lot of debt.
- The business is cyclical both from an economic perspective and a market share perspective.
- The stock is illiquid as a few owner's control 70% of the company. Fewer than 200k shares trade a day on average.
- Phil Falcone does not seem to have the highest ethical standards as he borrowed money from his hedge fund while locking up other investors.


The valuation of Spectrum Brands is attractive compared to its peers and is the most tempting aspect of the stock. I suspect that it will outperform but in the end I decided not take a position due to the negative factors I listed.

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Thanks to Tsachy for the write-up. We've also highlighted how Harbinger has been buying SPB shares recently. The hedge fund originally acquired shares back in August 2009 when the company emerged from reorganization (Chapter 11).

At a past investment conference, Falcone has previously stated that he likes Spectrum Brands' solid balance sheet, high 11-12% free cashflow yield, and the fact that the company had been focused on debt paydown by reducing leverage from 3.5x to 3x.


You can scroll through all of the previous stock of the week articles via this link.