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Newell Down 20% in 3 Months: Is a Turnaround on the Cards?

Zacks Equity Research

Newell Brands Inc. NWL is smoothly progressing with the execution of the Accelerated Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement and cost-saving plans. In sync with this plan, Newell has been divesting its underperforming and non-core assets in order to simplify the operating structure and boost profitability.

However, shares of this consumer products company have lost 19.7% against the industry’s 2.4% growth in the past three months. This underperformance might be attributed to the company’s dismal top-line trend, having lagged the Zacks Consensus Estimate in five of the trailing six quarters.

Lower core sales, foreign currency headwinds and adverse impact from the new revenue recognition standard have been hurting sales. Unfortunately, management anticipates core sales decline of 2-4% in the first quarter and low-single digits in 2019. This reflects persistent softness in the top-line performance in the quarters ahead.

Additionally, net sales are projected to be $8.2-$8.4 billion for the full year, down from $8.6 billion generated in 2018. Foreign currency translations are expected to hurt sales by roughly 150 basis points (bps).

Furthermore, Newell estimates net sales of $1.66-$1.70 billion for first-quarter 2019, down from $3 billion generated a year ago. Normalized earnings per share are envisioned in the band of 4-8 cents for the first quarter, down from 34 cents earned in the year-ago quarter.

Newell’s Transformation Plan

While the afore-mentioned factors make us apprehensive about Newell’s performance, its efforts to improve operational performance via Transformation Plan bode well. The key aspect of the Transformation Plan is restructuring the company into a global consumer product entity, valued at more than $9 billion. Furthermore, the company plans to offload non-core businesses that account for nearly 35% of the company’s sales, utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase as well as retain its investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

The execution of this Transformation Plan will lead to simplification of the company’s operations, which is likely to reduce its number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% as well as lower above 30 ERP systems to two by the end of 2019.

As part of the progress, Newell recently agreed to sell its Process Solutions business for after-tax proceeds of $500 million. Earlier, it agreed to divest the Rexair business to Rhone Capital. These transactions are anticipated to close by the end of the second quarter of 2019. Management also expects to split up the Consumer and Commercial Solutions business besides offloading the MAPA and Spontex businesses in a separate transaction. It expects these divestitures to be completed by the end of 2019.

Proceeds from the recent sale of assets have been utilized to lower debt and make share repurchases. Impressively, Newell deployed $102 million for the payment of dividends and $996 million for share repurchases in the final quarter of 2018. Also, the company repaid debt of $2.6 billion. In 2018, it generated more than $5 billion of after-tax proceeds from divestitures.

Wrapping Up

We expect the company’s robust Transformation Plan to address the hurdles and well-position Newell for growth in the future.

Not to forget, Newell’s gross margin returned to growth in fourth-quarter 2018 after seven straight quarters of contraction. Gains from the company’s productivity initiatives, pricing actions and the revenue recognition standard drove gross margin, somewhat offset by higher inflationary pressures. Additionally, the company recorded the second consecutive quarter of operating margin expansion, which is expected to continue in 2019. Normalized operating margin is likely to expand 10-50 bps and 20-60 bps in the first quarter and 2019, respectively.

Furthermore, Newell’s robust earnings surprise history with an expected long-term earnings growth rate of 4.9% highlight its inherent potential. The company has outpaced the earnings estimates in 10 of the trailing 12 quarters.

These positive attributes along with the solid progress of the Transformation Plan might help in the revival of this Zacks Rank #3 (Hold) stock.

Three Better-Ranked Stocks in the Consumer Staples Space

Medifast, Inc. MED has an impressive long-term earnings growth rate of 20% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Colgate-Palmolive Company CL has outpaced the earnings estimates in the trailing four quarters, the average being 0.7%. The company has a Zacks Rank #2 (Buy).

General Mills, Inc. GIS is also a Zacks Rank #2 stock, which has delivered average trailing four-quarter positive earnings surprise of 11.1%.

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