Newell Brands Should Continue to Clean Up

 | May 09, 2017 | 11:00 AM EDT
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Yesterday, Newell Brands (NWL) reported a blowout quarter and the stock jumped almost 12%. Can this housewares maker continue to clean up?

I have been bullish on shares of Newell Brands for a while. (Newell Brands also is part of Jim Cramer's Action Alerts PLUS charitable trust.) I thought the company was on the right track with its massive restructuring program.  After Newell merged with Rubbermaid, management launched it "Growth Game Plan," which consolidated its nine operating units down to three. The company focused on fewer, more profitable products and sped up its go-to-market strategy. Last year, after the Jarden acquisition, the company doubled down on its strategy and it seems to be paying off.

Newell Brands reported first-quarter 2017 earnings of $0.34 per share, $0.05 better than the consensus estimate. Earning benefitted from a $784 million gain on the sale of the Tools business, sales growth and Project Renewal savings.

Revenue rose 148.4% to $3.27 billion due to the acquisition of Jarden and the divestiture of the tool division. With the divestiture of the tools business, Newell now reports in five segments: Live, Learn, Work, Play and Other.

Adjusted "core" sales grew 2.5%, driven by strong growth in the baby and appliance businesses. The Graco SnugRide infant car seat, featuring SnugLoc technology that is designed to simplify car seat installation, drove strong results in the Live segment.

Live was up 2.7%, Learn was up 7.5%, Work fell 2.9%, Play was up just 0.5% and Other jumped 12%.

Normalized gross margin was 34.5% compared with 38.6% in the prior year. Operating margin was down 250 basis points to 10.6%. Margins were hurt by the negative mix of the Jarden acquisition, cost inflation in certain inputs and foreign currency translation.

E-commerce grew double digits and now represents 10% of total company sales.

The board raised the dividend 21% to $0.23 per share.

The company guided fiscal 2017 earnings per share to a range between $3.00 and $3.20, which was up $0.05 from the previous guidance. The core sales outlook was unchanged at 2.5% to 4%. The tax rate guidance was unchanged at 23%.

Despite the big pop in the stock, I remain bullish on shares of Newell. It seems that the company has at least a year of margin expansion ahead as it continues to execute on its Growth Game Plan. For example, management's guidance implies that gross margin will increase the next three quarters. If that's the case, Newell will end fiscal 2017 with a 37% gross margin. Selling, general and administrative expenses (SG&A) as a percent of total sales are expected to decline the rest of this year and next as the company executes its restructuring strategy.

Using the consensus estimate, analysts are expecting EBITDA to grow 12% this year and over 17% next year. Net income should be up about 22% this year and 14% next year.

Add it all up and based on low single-digit core sales growth Newell should be able to deliver earnings at the high end of the guidance range ($3.20) and over $3.50 next year. Historically, the shares trade between 15x and 17x forward estimates. I think investors will give Newell a multiple toward the high end of its historic range (17x) because of the strong performance of the company. Newell continues to outperform its peers in the housewares group and I think the shares can reach $60 within the year.

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