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Newell Rubbermaid: Evolving In To A Multi-Year Growth Stock
By: Mani   Monday, May 7, 2012 1:47 PM
Symbols: NWL, PG
While historically this had been done in a rather democratic fashion, the company started reallocating a greater portion of resources to those businesses with the greatest growth potential.

"As the game plan takes hold, we believe NWL's financial performance will show further improvement, and we are confident the company can achieve its goals of mid-single-digit core sales growth and 15% operating margins over the next few years, up from core sales growth of 2-3% and operating margin of 12-13%. This would put EPS comfortably north of $2.00 and, with the likely multiple expansion afforded the stock, should result in very attractive returns for shareholders," Altobello wrote.

Newell Rubbermaid, which owns brands such as Sharpie, PaperMate, Waterman, EXPO, Rubbermaid, Calphalon and Graco, said its first-quarter profit rose $79.3 million or 27 cents per share from $75.7 million, or 25 cents per share reported last year.

Normalized earnings, which excludes restructuring and related costs, increased 13.8 percent to 33 cents a share, topping Street view by 2 cents. Net sales for the quarter grew 4.6 percent to $1.33 billion, which also exceeded analysts' estimate of $1.30 billion.

One of the attractive aspects of the Newell business model is its ability to generate ample free cash flow, which provides the company with significant financial flexibility. CEO Polk is committed to returning cash to shareholders, and in fact during the first quarter earnings conference call late last month, he reiterated the company's target payout ratio of around 30-35 percent, which compares to just below 20 percent today.

"We anticipate a meaningful increase in NWL's dividend over time, which would likely increase the stock's attractiveness to income-focused investors. That said, we don't anticipate a step-change in the dividend but rather a gradual increase, which would allow the company to balance the competing goals of returning capital to shareholders and investing in growth opportunities, particularly in developing markets," the analyst said.

Investors are also showing faith in Polk's leadership as shares were up 21 percent since he assumed the CEO role in mid-July, easily outpacing both the S&P 500 and the S&P Consumer Discretionary Index, which are up 4 percent and 11 percent during this period, respectively.

The reason for the recent upward move in the stock is clear. The business trend has stabilized with healthy core sales growth driven by market share gains and margin improvement, which in turn has led to upside EPS surprises

Further, after a strong move in late 2011, the stock has been range-bound between $17 and $19 of late, with the company facing somewhat more difficult comparisons in the second and third quarter. "However, we believe this "lull" provides investors with an opportunity to build a position in the name ahead of the expected resumption in EPS growth in 4Q and beyond. This is not to say there are no near-term catalysts for the stock, as potential dividend hikes and the company's upcoming Analyst Day in Atlanta on May 24th should pique investor interest," said Altobello, who has an "outperform" rating and $23 price target on Newell shares.

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