Newell Brands Inc. $NWL
My Investment Checklist
1. Is the company undervalued?
EV/EBIT: 11.36
EV/Sales: 1.12
Price/Book: 1.41
$NWL has a robust portfolio of consumer brand name products. While unsexy the company has historically been shareholder friendly and grown at a market rate. On the other hand, $NWL is challenged with a difficult environment near term as retailers have begun to drastically slow their orders. Moreover Newell’s debt load is becoming worrisome with negative FCF YTD and the cost of capital skyrocketing. However $NWL is trading at a step discount compared to its history and should continue to grow once they navigate thru this choppy period. If the company comes out unscathed shareholders could benefit from a multiple rerate, while getting paid handsomely to wait.
2. Can I easily explain what the company does?
Yes $NWL sells varying consumer products and their business segments are comprised of; writing, food, home fragrance, commercial, baby, outdoor & recreation, and home appliances. Their most notable brands include; Sharpie, Elmer’s, Expo, Ball, Yankee Candle, Rubbermaid, Coleman, and Crockpot.
3. Does the cash flow statement line up with income statement?
Negative, there’s been a huge discrepancy between reported earnings and cashflow:
The root cause of this is a change in working capital, which was over $1.3B in the last 12 months. In fact inventories are up ~20% YOY, management is taking ownership of this fact and believes most of their inventory will sell thru:
“Christopher Peterson (CFO)
Yes. As Ravi said, it's unlikely that we're going to have significant obsolescence charges. We don't see that as an issue. And the background for that is the way that we're planning to rightsize our inventory is predominantly through reducing the supply plan. And we think that's the better way to do it because that avoids disrupting the marketplace by trying to liquidate product in the market at excessive discounts.
Most of the higher than going level of inventory that we have, as Ravi said, is good inventory that doesn't have an expiration date that's excess rather than things that have been discontinued. And so the one thing that, that will impact in terms of the P&L that we're seeing and is embedded in our Q4 guidance is that as we pull back on the supply plan, there is manufacturing fixed cost absorption issue, and that's probably affecting the Q4 gross margin by maybe 100 basis points or so because of the actions we're taking. That's a temporary phenomenon, but we think it's the right thing to do for the long term.”
This answer leads me to believe that management is long term oriented and looking to drive shareholder value. A lesser manager would pursue heavily discounting near term to avoid deleveraging fixed assets that will make reported earnings look ugly in the next couple of quarters.
Other than that most of cash used was for dividends paid out, share repurchases, capital expenditures, and debt repayment. I would’ve preferred more debt repayment, but that’s a fairly small nitpick and I have the benefit of hindsight.
4. Is the Balance Sheet Healthy?
Total Cash: $636M
Total Debt: $6.51B
Current Ratio: 1.25
$NWL holds a significant amount of debt and have a net debt to EBIDTA ratio of 3.9. That’s no doubt suboptimal, but I’ve seen far worse. For example, net interest payments last year only totaled $230M, which works out to a ~4.3X net interest coverage ratio. That’s actually above average, but the company recently took on more debt and interest rates have skyrocketed. Nonetheless $NWL should be decently covered assuming no collapse in earnings, but the balance sheet is by no means pristine.
5. How profitable is the business?
Gross Margins: 30.8%
Operating Margins: 9.9% (adjusted)
Net Margins: 5.7%
I wouldn’t consider $NWL to be a wonderful business, but it’s not gross either. In fact, margins have been fairly consistent historically:
With that said profitability is expected to take a huge hit in the next quarter or two as a result of slowing down production. However after that period, I don’t think it would be unreasonable to forecast out a 9% EBIT margin long term.
6. What is the company’s growth potential?
10-yr Revenue CAGR: 6.7%
10-yr Operating Profit CAGR: 3.99%
These numbers aren’t gonna blow anyone away, but prove that the company isn’t a melting ice cube. $NWL also engages in a fair amount of M&A, spending $1.6B on net over the 10-year sample period. These acquisitions also haven’t panned out well for shareholders. $NWL took a $148M impairment charge in the last quarter and a $212M charge in 2020. With that said $NWL has been on net divesting parts of their business over the last 6 years and are actively trying to reduce their sku count. For these reasons I doubt $NWL makes any outside purchases in the medium term.
7. Is management rewarding shareholders?
$NWL currently offers investors a generous 6.89% dividend. Although there’s speculation that the dividend will need to be cut as earnings are coming under fire. However the CFO put boomers minds at ease during the last earnings call:
“Christopher Peterson (CFO)
Yes. So let me tackle the cash question. Our focus remains consistent that we believe we've got an opportunity to generate significant operating cash flow, and that's our first priority with regard to capital allocation. With that cash flow, we continue to invest in the business where we see strong return on investment projects. And typically, we're looking for 30% plus rates of return on that capital investment.
Beyond that, we pay a dividend that I think we've been relatively clear that we expect to maintain as flat. We continue to expect that. There's been no change in our outlook on the dividend. In the short term, because of the increase in working capital that I mentioned that's putting pressure on cash flow this year, we will wind up with short-term debt at the end of this year and a higher leverage ratio than typical, but we view that as a temporary phenomenon.
And we believe that we are going to rightsize our working capital in the first half of next year. With that rightsized working capital in the first half of next year, we will use that to pay back -- to pay down the short-term debt is the current plan. The ultimate goal of getting to a 2.5 leverage ratio in the mid- to long term remains the same.”
I’m extremely skeptical that $NWL will get to a 2.5X leverage ratio anytime soon, but do think they should be able to service their debt, reinvest back into the business, and pay out a dividend. Chiefly because FCF should be higher than reported earnings near term, but would keep a close eye on debt levels and interest payments if I were a shareholder.
8. How does the company stack up against their peers?
$NWL is a fairly sizeable conglomerate and don’t have a true apples to apples competitor, so for that reason I’m skipping this question.
9. What’s the counter argument?
The counter argument is that an economic slowdown will be persistent and $NWL won’t be able to sell thru as much of their inventory as anticipated.
This thesis makes sense to me, $NWL is reliant on retailers to sell thru their product. These purchasing decisions are unfortunately largely out of Newel’s control. Although management did state that inventories in the channel are actually at a normal level. With that said I could certainly see why a Target or Walmart would want to operate at leaner inventory levels moving forward.
10. Is there something I think the market may be missing?
$NWL is being punished for a large inventory pile up, however this might be overdone. The company isn’t selling fashion merchandise or a technology widget. Obviously avoiding the present situation would be preferred. Nevertheless I don’t check expiration dates when buying a Rubbermaid food storage container or Yankee Candle. Yes, it may take a year or two to work thru the inventory, but I think $NWL can move their product at or near full price.
Final Thoughts:
My base case for $NWL would be 5% EBIT growth annually for 5 years, a 6% net shareholder yield per year, and a 14X EV/EBIT exit multiple at the end of year 5. That works out to a little more than a 15% expected CAGR, which is no doubt impressive. Although it doesn’t come close to a top 10 idea. With that said it’s a company I would definitely keep track of as $NWL is a predictable business that checks most of my boxes.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice