This morning, the market is trying to rebound from the worst single-day performance since October 1987, and certainly one of the worst weeks on record. The carnage has rippled through just about every sector of the market. I don’t think it’s too surprising, given the way coronavirus has continued to dominate practically every single headline. The responsiveness of the healthcare industry and government has been called into question, with people everywhere scrambling to catch up. While the net effect of the virus, from both a societal and economic perspective, is still likely to be temporary, it still leaves corporations and workers throughout the world trying to determine what steps they need to take to make it through whatever that time period is.
Speaking from an objective, dispassionate perspective, the silver lining in the market’s major drop since mid-February is that, as hard as it is to watch, there is also a point where that drop translates to opportunity. The broad market is down a little over -20% over the last month; in the meantime, there are a lot of stocks in the marketplace that are down as much as -40% to -50% over the same time period. If this drawdown is, as expected, ultimately temporary, that means that many of these stocks could mark the biggest bargains, and some of the best opportunities for a long-term oriented investor to think about.
Newell Brands Inc. (NWL) is an interesting example. It peaked around the same time the borad market did, in February a little below $21. The bear has pushed this stock down to just a little above $11 as of yesterday’s close, meaning that the stock is down nearly -50% in the last month. 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. The business has been working for most of the last couple of years to implement a transformation plan that the last few earnings report suggest have started to positively impact the company’s bottom line. Does that mean from a fundamental perspective, NWL is turning a corner, and this latest, market-induced plunge is really just a great buying opportunity? 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 $5.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings dropped about -10.5%, while sales rose a little over 12%. IN the last quarter, earnings declined by about -42.5% and sales increased by almost 15.8%. The company’s margin profile is narrow, but strengthening; in the last twelve months, Net Income as a percentage of Revenues was 1.79% and improved significantly to more than 23.1% in the last quarter. Late last year, these numbers were sharply negative on both a quarterly and trailing twelve-month period, so the swing to positive in both areas is a solid sign of improvement.
Free Cash Flow: NWL has healthy free cash flow of a little over $779 million over the last twelve months. This number was just $295 million at the beginning of this 2019, so this is a good confirmation of the improving fundamentals shown by the Net Income pattern. Their current Free Cash Flow number translates to a useful Free Cash Flow Yield of 8.75%.
Debt to Equity: the company’s debt to equity ratio is 1.19, which is high and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $348.6 million versus almost $5.9 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 in late 2018, 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 8.14% at the stock’s current price. It is worth noting that the company’s dividend payout exceeds its earnings per share over the last year; this is a pattern that can’t be sustained in the long term. It implies that as long as fundamentals continue to improve, the dividend should safe; but any kind of negative turn in Net Income or cash flow could put the dividend at risk of being cut or suspended altogether.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $24.79 per share. That means the stock is massively undervalued, with 119% upside from the its current price.
Technical Profile
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, with the stock plunging this week to new multi-year low prices. If it can find support anywhere around its current price, the stock could have good short-term upside to about $14 per share. To establish a useful, new bullish trend, the stock would probably need to push above $15.50, to about $16 at minimum. If it continues to drop below $11, it could test lows not seen since 2009 between $4 to $8 per share.
Near-term Keys: I like NWL’s fundamentals, and I think management is doing a good job so far of executing its transformation strategy. I also think that the company offers products that are useful in any economic environment; however I also think that current uncertainty and fear is likely to keep working against the stock. That means that while the value proposition is compelling, I would wait to see signs of NWL’s price, and the broad market beginning to stabilize before trying to find a new potential value-based entry point. A bullish short-term trade is entirely speculative, but if the stock does continue to rally and push above $12, it could offer an opportunity to buy the stock or work with call options with a target at around $14. If the stock drops below its latest low a bit above $11, you could consider shorting the stock or working with put options, with useful targets anywhere between $4 and $8 to close a bearish trade.