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Newell Rubbermaid (NWL): Shares Look Attractive as Turnaround Continues

 November 27, 2012 05:01 PM

(By Mani) Newell Rubbermaid, Inc. (NYSE:NWL) is well positioned to continue to deliver steady improvements in core sales growth while meaningful cost savings provide both the fuel for this growth, as well as visibility into earnings.

Based in Atlanta, Georgia, Newell Rubbermaid is a global marketer of consumer and commercial products. Its brands include Sharpie, PaperMate, Waterman, EXPO, Rubbermaid, Calphalon, Graco, Goody, Irwin, and Lenox.

The company is currently embarking on what is essentially the third transformation under President and CEO Mike Polk, having restructured both its manufacturing base and product portfolio prior to his arrival. With that, Polk intends to pivot Newell from a holding company to an operating company.

[Related -Dividend Roundup: AME, CA, CVC, DOW, NUS, NWL, WTR]

"We believe NWL has a number of inherent attributes that should ease the process, including: 1) a concentrated portfolio of strong yet undernourished brands; 2) meaningful emerging market opportunities; 3) significant structural SG&A that can be redeployed into growth; and 4) ample free cash flow," Oppenheimer analyst Joseph Altobello said in a client note.

As for next year, Newell will be transitioning from the Delivery phase of its Growth Game Plan to the Strategic phase, characterized by 3-4 percent core sales growth, and while Polk would not commit to this level of growth for the full year, he does expect further acceleration off of 2012.

The company has a very concentrated portfolio, with 85 percent of its sales coming from just 14 brands, which are strong, but undernourished.

[Related -Newell Rubbermaid (NWL) Earnings Top View As Sales Rise, Guides In Line]

"This concentration should enable NWL to drive meaningful improvements in sales by increasing its level of investment behind just a few key brands," Altobello wrote.

The company would continue to deliver steady progress on core sales growth while the recently upsized savings target from Project Renewal gives the company the ability to increase brand investment meaningfully while still having significant visibility and line of sight into future earnings growth.

Meanwhile, Newell would take a very deliberate approach to developing market expansion in order to avoid over-extending itself. In addition, it suffers from a rather unusual problem in that its developing market margins are too high owing to a lack of investment historically and that its developed market margins are too low.

As such, Newell's expansion in developing markets will likely require increased levels of investment, leading to faster top-line growth.

"We would expect NWL to operate on both of these tracks simultaneously so as to minimize the impact on the company's overall profitability, thereby helping to drive continued annual improvement in NWL's consolidated operating margins," Altobello said.

The company generates significant amounts of cash, which provides it with significant flexibility when it comes to deploying this cash in the future, either in the form of share repurchases, dividends and potential M&A activity.

The company recently announced a 50 percent increase in its quarterly dividend to 15 cents per share effective fourth quarter of 2012, which will bring payout ratio to the high end of its targeted range of 30 to 35 percent.

In the third quarter, the company posted net income of $108.3 million or 37 cents per share, compared to a net loss of $177.6 million or 61 cents per share in the previous year. Excluding certain items, normalized earnings per share were 47 cents per share, topping Street view of 44 cents per share for the quarter.

Net sales for the quarter decreased 0.9 percent to $1.54 billion in line with consensus. Meanwhile, core sales, which excluded the impact of changes in foreign currency translation, grew 1.5 percent.

For the full year 2012, the company still expects normalized earnings per share of $1.63 to $1.69 and normalized operating margin improvement of up to 20 basis points.

Net sales are projected to be flat to up 1.5 percent. Core sales growth is expected to be 2 to 3 percent. Analysts currently expect the company to earn $1.69 per share for the year.

Shares of Newell have gained 45 percent in the 31 percent year-to-date and 23 percent in the last three months. They have been trading at 11.5 times its 2013 consensus earnings estimates. The company is expected to return 11.8 percent on invested capital and 24.7 percent on common equity.



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