Where is NWL’s bargain price today?

One of the open questions of the past year has been about the point in time where questions, discussions and commentary about the economy and the world don’t continue to revolve around the pandemic. That question remains unanswered, but as an analyst, part of my job is to sift through the relentless, constant stream of opinion, data, and headlines we all get to see on a daily basis to identify signs where conditions might be about to change.

That is much more an art than anything else, and as with all artistic endeavors, the interpretation and appreciation of that process is usually, completely subjective and unique only to the observer. That’s why I take the opinions offered by most analysts and “experts” with a grain of salt. Even so, sometimes there is information that I think is better than others, and in the context of current health and economic conditions, that can be an early sign that just maybe there is change on the horizon.

In the last few days I’ve noticed an increasing amount of commentary about inflation. Coronavirus didn’t go away, and neither did questions about things like unemployment, vaccine distribution and administration, and so on. But ahead of Fed chair Jerome Powell’s statement today to the Senate Banking Committee, and with bond yields having started to spike a bit over the last few days, I noticed the discussion seemed to shift a bit, and even away from most the same questions that have dominated the past year, including what the Fed would decide it needed to do to stimulate economic growth. Instead, opinions and speculation have centered around how close the economy is now to the Fed’s long-stated inflation target of 2%, and whether it would be enough to warrant a change in Mr. Powell’s analysis. It’s a subtle change, but it is also a forward-looking question doesn’t simply reflect the hope of something different due to pandemic exhaustion. It suggests that analysts and investors are starting to think about the path ahead in more objective and critical terms. Whether that is a good thing or bad thing is still unknown, but I also think the shift could be important.

Increasing inflation sounds scary, but by itself, and in the early stages of growth it is also typical of a recovery from economic slowdowns and a sign that the economy is returning to growth. That is usually a positive, and the Fed has indicated for years now that its primary benchmarks come from information about unemployment and consumer prices. Powell’s statement this morning made clear that the Fed doesn’t see the kind of inflationary growth that some have wondered about; consumer prices in the broadest sense indicate that inflation remains below the 2% long-term target they’ve set, with a long road ahead to push unemployment down off of levels that are still above the peaks seen in the Great Recession more than a decade ago. That means, not surprisingly that the Fed is going to continue to maintain its current accommodative policy, even while he also acknowledged that broad-based declines in COVID cases and increasing vaccination numbers “point to an improved outlook for later this year.”

That anticipation of a “return to normal activities” has pushed a lot of stocks that make up the sectors and industries that personify some of those activities into long upward trends over the past year. That usually means that for value investors, this stocks become less attractive and less practical – but there are exceptions. Newell Brands Inc. (NWL) is an interesting example. After plunging to a bear market low at around $11 in March, the stock pushed into an extended bullish trend that peak this month at about $27 per share. 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 few years to implement a transformation plan that recent earnings reports suggest have started to positively impact the company’s bottom line, which has helped give the market justification to push the stock higher. From the stock’s recent peak, the price has also faded back by about -11% as fo this writing. If NWL’s fundamentals are still improving, does the stock’s recent pullback represent a new opportunity to work with a stock at a useful value? Let’s take a look.

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 $10.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased 33.33%, while sales improved by almost 2.5%. In the last quarter, earnings declined by -33.33% while sales were flat, but negative at -0.37%. The company’s margin profile over the last twelve months is negative, meaning that NWL’s paid more in expenses than it brought in. Net Income versus Revenue was -8.2%, but improved to 4.61% in the last quarter. Before the pandemic, these numbers had reversed a prior negative pattern to show strong operating margin growth, which means that the last few months have put the company’s operations under significant pressure yet again. The fact that the most recent quarter is positive, for earnings and revenue growth as well as Net Income, is an encouraging sign. It is also useful to observe that while the twelve-month number is negative, it also improved from about -11.5% in the quarter prior, with the quarterly number also strengthening from a little over 3%. That is a useful sign of progress.

Free Cash Flow: NWL has healthy free cash flow of almost $1.2 million over the last twelve months. It’s worth noting that in the first quarter of 2020, this number was $1 million, so this number offers an interesting counterpoint to the negative 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 11.45%.

Debt to Equity: the company’s debt to equity ratio is 1.32, which is a bit high and is reflected in the company’s balance sheet. As of the last quarter, cash and liquid assets were $981 million versus a little more than $5.1 billion in long-term debt. While NWL is highly leveraged, both cash and debt have improved. It is 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. Considering the positive pattern of Free Cash Flow and their improving operating profile, debt service is not a concern.

Dividend: NWL pays an annual dividend of $.92 per share, which translates to a very attractive annual yield of 3.81% at the stock’s current price. It should be noted 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 a continued negative pattern in Net Income or reversal of free 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 $26.50 per share. That means that at the stock’s current price, it is modestly undervalued, with 11% upside from its current price. I should also mention that at the end of 2020, NWL’s fair target was about $23 per share. A more useful bargain price is around $21.50.

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 year. The diagonal red line traces the stock’s upward trend from its bear market low last March around $10 to its peak earlier this month at around $27. It also informs the Fibonacci retracement lines shown on the right hand side of the chart. The stock is currently retracing off of that high, and appears to be looking for support around $23 per share. If it can pivot at this level and start to move higher again, its immediate resistance is at around $26, with $27 possible if bullish momentum starts to increase. A drop below $23, has relatively limited downside, with next support sitting at about $22, and $20.50 where the 38.2% retracement line sits if bearish momentum increases.

Near-term Keys: Overall, I like NWL’s fundamentals; management has been effective at executing its transformation strategy over the last year, and even with COVID-related pressures, 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 long-term recessionary economic conditions could dampen demand and put pressure on revenues. That means that while the value proposition is interesting, there are some risks that the current drop off of its 52-week high could be signaling, which means it might be smarter to wait and see if the stock drops to a more useful bargain price at around the $21.50. If you prefer to work with short-term trading strategies, a pivot low off of $23 could offer a useful opportunity to buy the stock or work with call options, using a range between $26 to $27 acting as a good profit target. A drop below $23 could be a good time to consider shorting the stock or buying put options, using $22 to $21 as useful, early profit targets on a bearish trade.

X