Don't Underestimate Newell Brands' Ability to Sell

 | Aug 03, 2017 | 9:00 AM EDT
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Housewares maker Newell Brands (NWL) reports before the open on Friday, when there is a good chance the company will guide next year higher.

Back in May, after Newell blew out the first quarter, the stock jumped nearly 13%. I think fiscal 2018 estimates are too low and the stock could pop after management boosts guidance.

Newell reported first-quarter earnings of $0.34 per share, $0.05 better than expected. Revenues increased 148.4% to $3.27 billion. The jump included net sales from the acquisition of Jarden and were partially offset by the divestiture of its Décor and Tools business.

Core sales grew 2.5% in what was widely expected to be a tough quarter. Baby products, appliances, writing and the Jostens brand drove the increase. Operating margin fell 250 basis points to 10.6%.

The board of directors increased the dividend 21% per share to $0.23 per share.

With the recent acquisition of Jarden and the Project Renewal restructuring, Newell should be able to grow earnings faster than its peers. The company is spinning off unrelated businesses or low-margin segments that no longer fit with its long-term strategy. It has also reduced headcount and closed a number of manufacturing facilities over the last year.

For example, in late May, Newell announced it had sold its winter sports business to Kohlberg & Company for $240 million. The winter sports business was too seasonal and only had a 7.5% EBITDA margin. The company has also dumped its tool, Fire Starter and Rubbermaid tote businesses. Combined, those businesses accounted for an estimated $900 million in revenue, but carried below-average margins. Newell has yet to find a buyer for its heaters, humidifier and fan business. (If you know of anyone who wants those businesses, give them a call.)

In mid-June, management reaffirmed their guidance for the year. Specifically, the company predicted earnings per share of $3.00 to $3.20 versus the consensus estimate of $3.12 and previous guidance of $2.95 to $3.15, as the weighted average number of diluted shares was revised down by two million to around 490 million.

Revenues projection remained unchanged at between $14.52 billion and $14.72 billion.

While revenues projections are slightly below the analyst estimate of $14.75 billion, this doesn't seem to have caused much concern, since Newell is in the middle of an aggressive restructuring and it's especially difficult to estimate what businesses the company will be able to sell in the back half of the year.

Investors are looking towards next year, after the restructuring and divestitures are completed. Revenue is expected to grow just 1.5% next year, but earnings should be up nearly 13% to $3.53 per share, aided by share repurchases and a slightly lower tax rate.

To me, the consensus revenue growth estimate looks low. In 2014, Newell managed to grow revenue 6%, and over 3% in 2015. While the company has more than doubled its revenue through acquisitions since then, I think it can restart its growth engine.

About two thirds of its sales are from the United States, and it dumped its Venezuela operations, which were a big drag on the top line because of currency effects. In addition, management have made significant changes to the company's product portfolio, to better focus on faster-growing and higher-margin products. I wouldn't be surprised if the consensus of analysts had to raise their revenue estimates for next year.

If you figure the stock is worth a premium to the consumer discretionary and housewares subsector because of the restructuring and better margin profile, the stock should earn a multiple in the range of 19-20 times forward estimates and reach the mid $60s. That a premium of almost 24% on Wednesday's close.

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