A stock that is pursuing sound growth strategies can have a fall caused largely by reasons beyond its control.
This U.S. consumer manufacturer has a well-established stable of products and a long record of earnings growth and dividend increases. Yet the effect of recent hurricanes on its suppliers and the bankruptcy of Toys “R” Us contributed to a drop in the share price. Our recommendation did not change.
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NEWELL BRANDS INC. (New York symbol NWL; www.newellbrands.com) makes a variety of household goods. Those include pens (by brands such as Sharpie and Paper Mate), coffee makers (Mr. Coffee) and baby strollers (Graco). It took its current form through the merger of Newell Rubbermaid and Jarden Corp. on April 15, 2016. Former Newell Rubbermaid shareholders now own 55% of the combined firm.
Based on pro-forma figures supplied by Newell, the combined company’s sales rose 3.7%, to $13.3 billion in 2016 from $12.4 billion in 2015. If you disregard merger costs and other unusual items, earnings jumped 107.2%, to $1.22 billion from $590.7 million. Due to more shares outstanding, earnings per share rose 32.6%, to $2.89 from $2.18.
Newell continues to cut costs following the Jarden acquisition. It now expects to chop $1.3 billion from its annual costs by 2021.
In the quarter ended September 30, 2017, Newell realized $86 million of those savings. As a result, its overall earnings rose 11.7%, to $420.9 million from $376.9 million a year earlier. Due to more shares outstanding, earnings per share gained 10.3%, to $0.86 from $0.78. Sales declined 7.0%, to $3.68 billion from $3.95 billion. If you exclude businesses that Newell has bought and sold in the past year, its sales improved 0.4%.
Value Stocks: Dividend raised by 21%, now yields 3.0%
The company has already realized gains from several small acquisitions made in the past year. The company paid $472 million for Sistema Plastics, a New Zealand-based maker of plastic food containers. Newell also purchased Smith Mountain Industries for $100 million. The Virginia-based business makes home fragrance products, mainly under the WoodWick Candle brand. In all, those new operations will add $210 million to Newell’s annual sales.
At the same time, the company has begun to unload some of its less-important operations. That includes the recent sale of its hand-tool business to Stanley Black & Decker (SWK on New York, another recommendation of our Wall Street Stock Forecaster newsletter) for $1.95 billion.
The additional cash has helped Newell pay down the loans it used to buy Jarden. As of September 30, 2017, its long-term debt of $10.1 billion was a manageable 39.7% of its market cap. It also held cash of $792.3 million.
Newell stock moved down from its peak of $55 in June 2017 to as low as $27, although it is now above $31. The decline was partly due to the fact that several petrochemical facilities in Texas and Louisiana had to temporarily shut down due to damage caused by Hurricane Harvey. Those closures increased the cost of the plastic resins that Newell uses to make many of its products.
In addition, the bankruptcy of Toys “R” Us, a leading outlet for Newell’s Graco strollers, also contributed to the fall in the company’s share price.
The company now expects to earn between $2.80 and $2.85 a share for 2017. That’s down from its earlier forecast of $2.95 to $3.05 a share. The stock trades at 10.2 times the midpoint of its new range. Despite the higher plastic costs, Newell still expects its sales for the year to rise between 1.5% and 2.0%.
Newell Brands raised its dividend earlier this year. Starting with the quarterly dividend payment in June 2017, investors receive $0.23 a share. That’s up 21.1% from $0.19. The new annual rate of $0.92 yields 3.0%.
Recommendation in Wall Street Stock Forecaster: Newell Brands is a buy.
Hello TSI Team: You certainly make excellent points for NWL as an investment which could do extremely well in the next one to 3 years. Its very large debt levels however are a concern. Much of the debt is understandable [acquisition(s) ; hurricane impact on some plants &c]. Even allowing for the above, I find the debt level too high , and would be acceptable to an investor if NWL’s earnings and cash flow were projected to be higher than the mngt projects for 2018-19.
Thanks, Adam, for the thoughtful analysis. Newell’s success will be decided in part by its organization of operations and attempts to focus on its core business lines. We continue to see the stock as a worthwhile hold.
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Hello TSI Team: You certainly make excellent points for NWL as an investment which could do extremely well in the next one to 3 years. Its very large debt levels however are a concern. Much of the debt is understandable [acquisition(s) ; hurricane impact on some plants &c]. Even allowing for the above, I find the debt level too high , and would be acceptable to an investor if NWL’s earnings and cash flow were projected to be higher than the mngt projects for 2018-19.
Thanks, Adam, for the thoughtful analysis. Newell’s success will be decided in part by its organization of operations and attempts to focus on its core business lines. We continue to see the stock as a worthwhile hold.