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This Overlooked Stock Combines Growth And Income

Marshall Hargrave

Have you ever loved a particular product -- but had no clue about the company that made it? 

It's easy to identify the companies behind some beloved consumer products, such as Apple's gizmos or Coach's leather goods. It's just as easy to look up those companies and invest in their stocks. 

Yet there are tons of great companies that make a variety of great products -- but get little respect because investors fail to connect the products with the product makers. 

Ever wonder who owns the Sharpie brand? Parker pens? Liquid Paper? Calphalon cookware? Even the popular baby products company Garco? 

Newell Rubbermaid (NYSE: NWL) is one such overlooked company. Most investors know Newell Rubbermaid for its Rubbermaid brand of trash cans and food storage containers, but this diversified consumer products company makes a variety of other products that make the company itself a compelling investment. 

Writing products is the company's top segment when it comes to revenue generation, with home solutions in a close second, generating 30% and 28%, respectively. Making up the rest of its revenue are its tools, commercial products, and baby and parenting products segments.

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  Rubbermaid Products  
  Most investors know Newell Rubbermaid for its Rubbermaid brand of trash cans and food storage containers, but this diversified company makes a variety of other products that make its stock a compelling investment.  

The real beauty of Newell is its resiliency to return the cash flow that these products bring in to shareholders. In 2012, Newell generated over $440 million in free cash flow. It returned nearly half of that to shareholders through dividends and share buybacks. 

In late 2012, Newell boosted its dividend payment by 50%. The dividend yield is now 1.9%, but that's only a 38% payout of earnings. 

Newell expects to generate nearly $4 billion in operating cash flow between 2013 and 2017. What's most intriguing is that about $1.5 billion of that is uncommitted, but the company is looking at increasing dividends or share repurchases. 

So far, the company is starting with a $350 million accelerated share repurchase program that goes into effect this quarter. The company is funding this program with free cash flow and money from the sale of its hardware business.

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Helping the company return more cash to shareholders over the interim should be Newell's cost-saving Project Renewal program. Newell expects the program will be saving $180 million a year by the end of the second quarter of 2015. The company has undergone a complete restructuring, revamping its marketing and R&D divisions. The company's global supply chain is also more streamlined to boost operating efficiencies. The program is showing results: Operating margin improved to 14.6% in the third quarter.

Newell is still very much a U.S.-focused operator, with over 66% of its revenue coming from the the U.S. However, Newell's 3.3% year-over-year jump in core revenue in the third quarter was driven by impressive growth in Latin America, which saw 35% revenue growth. 

International represents a big growth opportunity for the company. This is especially true in Asia, which accounts for less than 10% of total revenue. Newell's primary focus is on expanding its China operations, both in terms of manufacturing and sales. Newell has expanded its Shanghai office to accommodate its growing team in the region. 

Currently, Newell's Lenox saws and tools and Parker pens are its main growth drivers in China. However, because the Chinese economy is growing so rapidly, there are plenty of growth opportunities for all of Newell's other brands, such as Rubbermaid Healthcare, Dymo industrial labeling products, and its other stationery brands like Sharpie, Expo and Papermate.

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Risks to Consider: Newell Rubbermaid is dependent on a continued recovery in the U.S. and Europe. The company also has to worry about rising material costs, which can impact margins. Lastly, Newell Rubbermaid relies on a handful of big retailers for the majority of its sales. The merger of Office Depot (NYSE: ODP) and OfficeMax will consolidate the office superstore market, which could lead to a onetime earnings hit for Newell Rubbermaid as retail inventories are rebalanced.

Action to take --> Buy Newell for upside to $44. A price-to-earnings (P/E) multiple of 22 on expected 2014 earnings per share (EPS) of $2 suggests the stock could hit $44 in about a year, representing 35% upside. Newell currently trades at a forward P/E multiple of 16, which compares favorably to its five-year average P/E of 22 and the industry average of 21.

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