Analysts at Canaccord Genuity (TSX:CF, LSE:CF) remain positive on Spectrum Brands Holdings despite the company reporting underwhelming second quarter results and cutting its full-year 2023 guidance for the second time in as many quarters.
The analysts increased their price target from $82 to $87 with a ‘Buy’ rating. Spectrum shares are currently trading at $72.
“Frankly, we believe 2Q results are temporary and secondary in nature, and believe investors should be focused on the $4.3 billion (about $3.5 billion after-tax) in hardware and home improvement (HHI) proceeds that will come through the door by June 30,” they wrote.
The company, which through its subsidiaries supplies hardware, personal care, household appliances, pet supplies, garden accessories, and more, posted a 10% year-over-year drop in sales for the quarter, which was 4% below the consensus estimate.
The analysts noted that Spectrum’s home and garden segment was the main culprit behind the miss, driven by more severe than expected retailer destocking, with home and garden sales down 22% year-over-year, 19% below consensus.
“While retailer destocking has gone farther than many investors have expected across businesses, we believe the excess — and then some — will have been flushed out of the channel by the end of FY 2023,” they wrote.
Looking ahead, the analysts noted Spectrum’s comments that it has seen positive gains in the third quarter so far due to favorable weather in key markets.
“Similarly, SPB believes consumer demand will remain strong, with the weather outlook pointing to a more normal season with higher temperatures and humidity,” they wrote.
The company also expects the trend of positive Global Pet Care sales in 2Q to continue in the second half of 2023, the analysts highlighted.
“The company remains cautious about the performance of aquatic environments and hard goods within companion animals as the rates of new entrants into the pet category settle to pre-pandemic levels which should be more than offset by the trends in companion animal consumable categories,” they wrote.
Further, they noted that a lack of a formal buyback announcement was disappointing but, at the same time, made sense.
“While SPB reiterated its intent to transform the company into a pure-play pet and home and garden player, we believe investors were looking for a formal buyback announcement with 2Q results,” they wrote.
“While SPB currently has a $1 billion share repurchase program that was approved by the Board of Directors starting May 4, 2021, which is effective for 36 months, we believe investors were looking for a commitment to repurchase $1 billion-plus.
“We model SPB repurchasing $1.25 billion over the next five quarters starting in 4Q 2023 – at which point it would be just 1.3x levered.”
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