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One of the hallmarks of the market’s upward trend this year (even factoring in the market volatility and pull back since late July from the latest all-time high) has been the strength of the U.S. economy. Even as trade uncertainty continues to keep investors and analysts on edge, concerns about interest rate policy persist, and an increasing number of CEO’s start to talk about tariffs and trade war as business headwinds, the truth is that by most metrics – healthy employment and improving wages, for example – the economy continues to be healthy.
That reality is reflected in the performance of most market sectors this year as well, including the Consumer Discretionary sector, which is up almost 16% year to date as measured by the S&P 500 Consumer Discretionary Sector SPDR ETF (XLY). This is a sector that tends to act as a pretty good barometer for consumer attitudes about the economy. It also covers a wide range of company types, from specialty retailers like Macy’s (M), Target Stores (TGT), Kohl’s Corporation (KSS) to the companies that produce the products and goods that fill those store’s shelves.
Newell Brands Inc. (NWL) is an example of a stock in this sector whose performance not only differs from the sector, but represents a true fall from grace. From a high in mid-2017 at around $55, the stock has plummeted over the last two years to a low point at around $12.50 per share. It has spent most of 2019 in a narrow range between $12.50 and $15. This is a stock with a large footprint in the Household Durables industry, with well-known brands in a portfolio lineup that includes Sharpie and Paper Mate writing utensils, Graco baby products, Rubbermaid, Elmer’s, Mr. Coffee, and much more. Why the poor stock performance? The company has been beset with management problems that have eroded the company’s profitability and prompted activist investors with large shareholder positions to push for changes to the company’s board of directors and agitate for a solid turnaround plan.
Those are problems that have been a primary catalyst for the stock’s poor performance, and the truth is that there are some fundamental indicators that are still pretty unattractive. Most of the steps the company has taken, however over the last year to transform their business have been completed and, as of the company’s most recent earnings report, seem to have started to positively impact the company’s bottom line. Released on August 1, the report was far stronger than the market expected, and has prompted the stock to increase more than 18% from that point. Does that mean NWL is turning a corner, and could be in the early stages of a major recovery from bargain-basement levels? If it is, you might want to consider taking a position now. Let’s take a look.
Fundamental and Value Profile
Newell Brands Inc. is a marketer of consumer and commercial products. The Company’s segments include Writing, Home Solutions, Commercial Products, Baby & Parenting, Branded Consumables, Consumer Solutions, Outdoor Solutions and Process Solutions. Its products are marketed under a portfolio of brands, including Paper Mate, Sharpie, Dymo, Expo, Parker, Elmer’s, Coleman, Jostens, Marmot, Rawlings, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert, Waddington and Yankee Candle. Writing segment consists of the Writing and Creative Expression business. Home Solutions segment designs, manufactures or sources and distributes a range of consumer products under various brand names. Commercial Products segment designs, manufactures or sources and distributes cleaning and refuse products. Its Baby & Parenting segment designs and distributes infant and juvenile products. NWL has a current market cap of $6.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased -45%, while sales declined almost -4%. The pattern is much more favorable in the last quarter, as earnings improved by more than 200% and sales increased by almost 24%. The earnings turnaround is also reflected in the company’s operating and margin profile; over the last year, Net Income was a shocking -85% of Revenues (putting much of the stock’s drop of the last year in perspective); however in the last quarter Net Income returned to positive levels, at 4.24%.
Free Cash Flow: NWL has healthy and improving free cash flow of a little over $762 million over the last twelve months. This number was just $295 million at the beginning of this year, so this is a good confirmation of the positive turnaround shown by the earnings and Net Income patterns. Their current Free Cash Flow number translates to a useful Free Cash Flow Yield of 11.2%.
Debt to Equity: the company’s debt to equity ratio is 1.45, which is high and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $624.5 million versus almost $7.3 billion in long-term debt. NWL is very highly leveraged, and while they should have no problem servicing their debt, liquidity is a concern. It is also worth noting that a year ago, long-term debt was about $9.3 billion, so this number has been declining steadily, which is a net positive.
Dividend: NWL pays an annual dividend of $.92 per share, which translates to a very attractive annual yield of 5.84% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for NWL is $11.82 per share. This is a number that cratered from early 2018, when it was a little above $29 per share, but over the last two quarters has improved steadily from a low point at $11.31. At the stock’s current price, that translates to a Price/Book Ratio of 1.33. The stock’s historical Price/Book ratio is 3.22, which provide an interesting long-term target price at around $38 per share. That is a level the stock hasn’t seen in the last two years, so it may be a bit over-optimistic; however it does imply the stock’s long-term upside potential is much higher than its downside risk.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend over the last two years. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. The downward trend is easy to see, but the interesting part is the stock’s consolidation pattern from March of this year to now. The stock held in a narrow range between $12.50 and $15 per share, but over the last week appears to have broken out of that range and is showing some solid bullish momentum right now. The stock’s 38.2% Fibonacci retracement line is at around $27.50 per share, which is a pretty interesting long-term target by itself. At this stage, a push above $16 could be a pretty good indication the stock’s short-term strength should give the stock room to run to somewhere between $19 to $22 per share. On the other hand, if the stock drops back below its previous resistance around $15, it should fall back to test its trend lows around $13.
Near-term Keys: I think the most interesting opportunity in NWL right now is on the basis of the value proposition, and lies in a long-term position. The stock has a compelling, attractive dividend and some useful indications that the company’s fundamental problems are shifting into its rear-view mirror. If you prefer to work with short-term strategies, you could use a push above $16 as a signal to buy the stock or work with call options with an eye on an exit target between $19 and $22 per share. If the stock drops below $15, you might consider shorting the stock or working with put options, but keep in mind that the range to its multiyear lows in the $12.50 to $13 range are not far away, so a bearish trade should have a very near exit target price in place.