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Newell Brands Seems Undervalued

- By Shubham Jaipuria

Consumer goods player Newell Brands Inc. (NWL) has been going through a rough phase currently. While the stock is down over 50% in the last year and about 31% so far this year owing to a multitude of events, multiple analysts across the Street are looking at this as a potential entry point, given its relatively low valuation. Moreover, its recent restructuring efforts have garnered a lot of traction from investors.


Although the trade war between the U.S. and China is still bothering investors and has been a major driving force for the stock's recent decline this year, the reaction seems to be overblown, primarily because all competitors will also be subject to the tariffs. As a result, there does not seem to be a competitor close enough to Newell who is subject to completely different economic factors and who is catering to the same target market.

Undeniably, investing in turnaround stocks can be a difficult decision to make. But the company's plans to divest few of its non-performing brands will help it pay down its massive debt pile, while also figuring out a plan to invest in alpha-generating new initiatives and buying back some of its shares at this cheap valuation.

Coming to other factors that dragged Newell lower, the Toys R Us bankruptcy had a massive impact on the stock. As Toys R Us got liquidated, Newell's baby business took a hit and had to settle for much lower margins for its products, given the fire sale as a result of the liquidation. Yet over time this shortfall might be taken care of by Amazon (AMZN) and Walmart (WMT)'s sales of Newell's products, thereby reducing the pain point associated with the Toys R Us liquidation.

Newell's restructuring efforts will allow the company to focus more on its high growth-generating initiatives, rather than burn cash on brands that aren't contributing enough to the company's top line. While it's home to brands such as Rubbermaid, Oster, Sunbeam, Mr. Coffee, Berkley and others, it plans to divest businesses contributing around 35% of net sales currently, including Waddington and Jostens. Although this will cause a hit to the company in the short run, the long-term benefit is expected to be massive.

The restructuring efforts are aimed at maintaining seven core consumer divisions, namely Appliances & Cookware, Writing, Outdoor & Recreation, Baby, Food, Home Fragrance and Safety & Security. Moreover, they will allow the company to deleverage itself in order to maintain the BBB- or higher rating to stay in the Investment Grade category and also maintain its round about 4.3% dividend yield.

While challenges still remain, it's clear that Newell has identified its mistake of holding on to the loss makers for too long. Hence, the company's idea to focus more on its top-performing brands by cutting down on the brands that are holding them down seems to be a rational bet. The strategy is similar to what investors are advised when trading in the markets -- not booking losses when it's time results in piling up of losses and eventually in the erosion of the portfolio.

As a result of all the factors mentioned above, Newell's current forward price-earnings ratio of 10.26 appears to portray the stock a grossly undervalued, especially compared to the industry median of 18.32. Moreover, the current price-earnings ratio of 4.78 as compared to the industry median of 19.86 supports the case. Adding to this, Newell's net margin of 16.39% is far above the industry median of 3.90%.

All told, this stock is a great example of the tradeoff associated with the risks of value investing. While it's difficult to predict whether a stock's decline is an appropriate entry point or not, Newell seems to be a player worth a second look. Being a company in a transition phase, this stock is not for the short-term players. With an expected inflow of about $8 billion to 10 billion owing to the divestitures, the company's more targeted approach is expected to significantly add to the top line in the future.

Disclosure: I do not own any of the stocks mentioned.

This article first appeared on GuruFocus.


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