2020 has proven to be a remarkable year, to be sure. The global pandemic has been an ever-present specter that has colored just about every major storyline for the year, whether you’re talking about politics, economics, social trends, or just about anything else. As it relates to investments, the market’s plunge from late February to March was perhaps the most rapid descent to bear market levels in history; the road back, while not as rapid, has also been remarkable, taking just about five months for the S&P 500 to follow the NASDAQ above its pre-pandemic highs by late summer, with the Dow Jones Industrial Average within striking distance. Political news, and uncertainty leading up to the presidential election not only about who would end up in the White House for the next four years but also what it might mean for further rounds of stimulus put the markets in a holding pattern until the beginning of November; but from that point investors have pushed the Dow and the S&P 500 to a new set of highs, with the NASDAQ only a little below its own high point. The surge now is being driven by some much better-than-expected results from late-stage COVID vaccine trials, increasing optimism that there is, indeed an end in sight.
One of the things that is important to remember about the stock market is that it always looks ahead of current events. Bullish momentum in the near-term is especially driven by positive news and events in the moment, and what investors hope that means for the future; but longer-term trends tend to be dictated by fundamentally-based data. In today’s environment, one of those critical pieces of fundamental data includes COVID vaccine and antiviral treatments. Even with the positive news of the last week or so, and the potential for regulatory approval before the end of the year, the fact is that distribution will necessarily be targeted to front-line responders, critically affected patients, and those who are the most at risk, with broader distribution to the the population at large not likely to be available until the second quarter of 2021.
While infections continue to rise across the country, there will remain a premium on taking measures to keep yourself and your loved ones as safe as possible. In the broadest sense, that means that some degree of self-isolation will persist well into next year. That also means that consumer trends that have been forced to shift to stay-at-home products and solutions will also continue to show strength for the time being.
Newell Brands Inc. (NWL) is an interesting example. After plunging to a bear market low at around $11 in March, the stock has recovered nicely, pushing near to its pre-pandemic highs around $21 as of this writing. The market has finally started to recognize that the company’s multi-year transformation plan, which began in 2017 has gained traction. 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. These are businesses that have benefitted from the push to stay-at-home eating, schooling and remote work requirements. These are also trends that I expect to see some stickiness through 2021, even after vaccines become widely available. The company’s bottom line and overall balance sheet has improved throughout the year, which has helped the market recognize the big value the stock offered earlier in the year. What about now? Has the stock risen past the point of useful value, or could there still be a good opportunity in place? Let’s find out.
Fundamental and Value Profile
Newell Brands Inc. is a consumer goods company. The Company has a portfolio of brands, including Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer’s, Coleman, Marmot, Oster, Sunbeam, FoodSaver, Mr. Coffee, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert and Yankee Candle. The Company operates under three segments: Food and Appliances (comprised of Appliances & Cookware and Food divisions), Home and Outdoor Living (comprised of Home Fragrance, Outdoor & Recreation and Connected Home & Security divisions), and Learning and Development (comprised of Writing and Baby & Parenting divisions). NWL has a current market cap of $8.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased about 15%, while sales were 10% higher. In the last quarter, earnings improved by 180% while sales increased by almost 28%. The company’s margin profile over the last twelve months is slightly negative, meaning that NWL has paid more in expenses than it brought in; Net Income versus Revenue was -1.11%, but improved to 11.26% in the last quarter. It is worth noting that before the company’s most recent earnings statement at the end of October, Net Income for the trailing twelve month period was -11.39%. This is a strong sign that the company is turning the corner on returning to profitability growth.
Free Cash Flow: NWL has healthy free cash flow of a little over $1.18 billion over the last twelve months. It’s worth noting that at the end of 2019, this number was $779 million, and $941 million in the quarter prior, which provides a strong confirmation of the positive Net Income pattern I just described. This number was also just $295 million at the beginning of this 2019, making Free Cash Flow growth a useful benchmark for the success so far of the company’s transformation plan. Their current Free Cash Flow number translates to a useful Free Cash Flow Yield of 14.2%.
Debt to Equity: the company’s debt to equity ratio is 1.55, which is high and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $858 million (up from $619 million in the quarter prior) versus almost $5.8 billion in long-term debt (down from $6.3 billion in the quarter prior). NWL is very highly leveraged, and while operating profits are sufficient to service their debt, and liquidity is improving, I would continue to keep an eye on these numbers in the quarters ahead. It is also worth noting that in late 2018, long-term debt was about $9.3 billion, so this number has been declining on a pretty steady basis.
Dividend: NWL pays an annual dividend of $.92 per share, which translates to a very attractive annual yield of 4.66% 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, and management has reaffirmed their commitment to dividend maintenance.
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 $26 per share. That means that even with the stock’s rally since March, it remains significantly undervalued, with 25% upside from its current price. It is also worth noting that in the last quarter, my fair value target increased from about $23 to its current level, which is another positive reflection of the company’s underlying, fundamental strength.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the stock’s price performance over the last two years. The diagonal red line traces the stock’s downward trend from a December 2018 high at around $24.50 to its bear market low in March at around $10.50. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. From that low, the stock has staged an impressive upward trend, pushing above the 61.8% retracement line in the last few week and pushing very near its pre-pandemic high at around $21, which is acting as the stock’s most immediate resistance level. Support is at $19, where the 61.8% retracement line sits. A push above $21 should give the stock room to about $23 where the 88.6% retracement line rests, or possibly to $24.50 if bullish momentum remains strong. A drop below $19 could see the stock fall to between $18 and $17.50 before finding next support based on pivot highs in July, August, September and October as well as the 50% retracement line.
Near-term Keys: NWL’s fundamentals are stronger than they have been in a couple of years. They are a good reflection of management’s effectiveness at executing its transformation strategy over the last year. Even with COVID-related pressures, the company has managed to bolster is balance sheet and operating cash flow. I also think that the company offers products that are useful in any economic environment; however I also think that recessionary economic conditions could continue to dampen demand and put pressure on revenues. That means that while the value proposition is compelling, there are some risks that could keep the stock from continuing its impressive upward trend if current consumer trends shift. If you prefer to work with short-term trading strategies, a break above $21 could offer a useful opportunity to buy the stock or work with call options, using a range between $23 to $24.50 as a good profit target. A drop below $19 could act as an early signal to think about shorting the stock or buying put options, using $17.50 as a useful, early profit target on a bearish trade and $16 within sight if bearish momentum accelerates.