Newell Brands Inc. NWL seems to be on a roll, thanks to its robust transformational efforts. The company has been smoothly progressing with the execution of its Transformation Plan through market share gains, point of sale growth, e-commerce improvement and cost savings. It has also been offloading non-core and underperforming businesses, which are likely to boost its operational performance and enhance shareholder value.
Backed by these laudable endeavors, this Zacks Rank #2 (Buy) stock has gained 27.8% in the past three months against the industry’s 17.2% decline.
Let’s delve deep.
Robust Transformation Plan
The key aspects of the Transformation Plan are restructuring the company into a global consumer product entity, valued at more than $9 billion. With regard to this, Newell plans to offload non-core businesses that account for nearly 35% of the company’s sales; and utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase. Newell also expects to retain its investment-grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.
Execution of the plan will simplify Newell’s operations, which are likely to decrease the company’s number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% as well as reduce above 30 ERP systems to two by the end of 2019. Management will also focus on right-sizing the cost structure for anticipated smaller net sales, removing stranded corporate expenses and recovering the synergies lost through divestitures.
Currently, Newell is pursuing divestitures of the U.S. Playing Cards, Mapa/Spontex and Quickie businesses, which are classified as assets held for sale. It expects to complete the divestitures of these businesses by the end of the current year, generating $675-$775 million of after-tax proceeds. Notably, this will mark the completion of the company’s Accelerated Transformation Plan.
Proceeds from divestitures are used to reduce debt as part of its efforts to deleverage the balance sheet for bolstering shareholder value and maintaining investment-grade rating. In second-quarter 2019, Newell lowered its gross debt by $517 million and net debt by $777 million. It now estimates to achieve a gross debt to an EBITDA leverage ratio of less than 4 by the end of 2019 and roughly 3.5 by the end of 2020.
However, management has decided to retain the Rubbermaid Commercial Products business owing to its record robust cash flow generation, sales and margins as well as solid long-term growth prospects. Newell expects this business, which was earlier classified as held for sale and discontinued operations, to be accretive to operating margins, normalized earnings per share and operating cash flow in 2020 and beyond.
Reflecting the benefits from the inclusion of this business, which will be effective from third-quarter 2019, the company raised net sales and operating cash flow guidance for the current year. For 2019, net sales are now projected to be $9.1-$9.3 billion, up from the previously mentioned $8.2-$8.4 billion. Operating cash flow is projected to be $600-$800 million compared with $300-$500 million guided earlier.
However, Newell grapples with soft core sales that are expected to decline 2-4% in the third quarter and low-single digits in 2019. Lower core sales along with unfavorable currency translations have been weighing on the company’s top line.
Nevertheless, we expect Newell’s strategic efforts including gains from the aforementioned Transformation Plan to keep driving the company’s performance. A VGM Score of A coupled with an expected long-term earnings growth rate of 6% further highlight the stock’s potential.
3 Other Key Picks in the Consumer Staples Space
Edgewell Personal Care Company EPC delivered an average positive earnings surprise of 25.5% in the last four quarters. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
US Foods Holding Corp USFD also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 9.3%.
WD-40 Company WDFC has an expected long-term earnings growth rate of 10% and a Zacks Rank of 2.
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