Stephanie Link: Newell Rubbermaid Can Bounce Back
I've been following Newell Rubbermaid (NWL - Get Report) and its turnaround story ever since Michael Polk became CEO July 2011.
We're not involved in the position for Action Alerts PLUS, but it is one that I've always had on my radar screen to buy on a pullback. There just hasn't really been one. It returned 37.2% in 2012 and 43.3% in 2013.
This year has been more of a struggle, with the stock disappointing on 1Q earnings and the shares off 6.4% year to date. Morgan Stanley upgraded it today and I certainly wouldn't chase it, but the pullback this year is giving us a chance to get into a stock with strong management, superior organic growth and solid free-cash-flow growth.
One of the reasons the stock caught my eye back in 2011 was Polk's somewhat unconventional management style. He decided right out of the gate to host his first annual convention for the company's top 250 global executives at the Carrie Steele-Pitts Home for Abused and Abandoned Children. Usually NWL's team-building meetings were held at a golf resort, but Polk chose a shelter instead and he and his executive team spent the day painting rooms, renovating the kitchen, installing office products and other volunteer work because he thought it would bring the team together while doing something for a good cause. He also gave out $50,000 worth of various Newell products -- items we all know well like Sharpie markers, Calphalon cookware, Levelor blinds, Rubbermaid containers and other products. At the time, I was impressed with his creativity and his doing good works, compared with the prior management team, and so I have followed Polk and Co. over the last few years.
I also believed in his strategy to build out the emerging markets share, which is now 13% of total revenue exposure and growing 12x that of developed markets. And I liked his plans to improve innovation and shed non-core assets. As the company began to execute on its plan, the results slowly improved and investors were rewarded with impressive returns as the stock was off to the races. I kicked myself for not buying it then, although I have recommended it on "Fast Money Halftime" a few times. Suffice to say, it's back on my watch list if the stock falls under $30.
NWL makes a variety of products. Writing instruments like Sharpie, Paper Mate, Waterman, and Parker account for 31% of total sales. Home solutions include Rubbermaid, Calphalon, Levelor, and Goody and that business accounts for 28% of total sales. Tools like Lenox and Irwin are 14% of sales. Commercial products like Rubbermaid commercial goods are 14% of sales and Baby products, including Graco and Aprica, are 13% of total sales. Polk and team have done a good job exiting non-core assets and spending on innovation and new products. Marketing spending has increased over the last two years and all of these efforts have led to more consistent earnings and organic sales.
Unfortunately, the good times hit a snag in the first quarter. The company missed on earnings tied to a Graco recall, reported weaker organic sales impacted by weather and took a heavy hit from currency translation. A lot of the problems were one-time in nature and although I am usually suspicious of the weather excuse, so many consumer companies saw similar problems. The 12% multiple contraction in the shares likely factors in the skepticism.
When you break down the 1Q organic sales growth, it does seem likely that weather played a role. Writing core sales rose 8% y/y, tools rose 2.4% and commercial products increased 0.2%. But home solutions core sales fell 4.5% due to bad weather and mix to low-end, lower-margin products and baby products core sales fell 4.4%, mainly due to the Graco product recall and the exit of some European assets. Total organic growth was just 0.7% growth vss the 4.4% seen in 4Q, but adjusting for the Graco recall, weather, and divestitures, total core sales were more like 3%. U.S. core sales were 1.5% and outpaced the overall market on strong share gains. International results were solid, with Latin America leading the way bringing in core sales growth up 10%/ That was offset by Asia Pacific down 0.3% and EMEA down an adjusted 1.5%. Margins were mixed, with gross margins up 60 bps on better productivity and pricing partially offset by the 20 bps operating margin drop and 80 bps increase in SG&A. A lower tax rate helped the bottom line as well.
So, a lot of puts and takes to the quarter. But importantly, the company reiterated its guidance for 2014 for 3-4% organic growth, gross margin expansion of 30-40 bps (due to productivity measures and pricing), operating margin growth of 40 bps and continued ad spend comparable to the 1Q 10% growth rate. NWL expects to generate $4 billion in operating cash over the next few years and that will be used for dividend boosts and M&A. In 1Q the company raised the dividend by 13%.
What will help boost organic growth is the higher planned advertising and promotional spending (especially media and digital) in 2Q and 3Q, which is now reflected in earnings estimates. The fourth quarter should be a big rebound as the company sees the benefits from the investment spending and positive operating leverage. Expect to see heavy advertising in Sharpie, Paper Mate, Graco and Irwin Tools in the next two quarters and then in 4Q more of an emphasis on the holiday in Calphalon. Offsetting the spending is its project renewal, which will save $100-200 million and provides good flexibility to the model. The international opportunities also are meaningful, as 80% of the company's revenue growth is coming from emerging markets, which still is less than 15% of total revenues. And market share gains are expected to continue in both the U.S. and outside the U.S., especially in writing.
At the current levels, just meet-and-reiterate results in 2Q and 3Q should be enough for investors, given the recent multiple contraction. But the real reason to own the shares will be the gradual reacceleration of organic growth throughout 2014 and the upside we should see by 4Q. At the current valuation of 14x forward estimates, the shares trade at a 28% discount to the group and an 8% discount to the S&P 500. With strong brands, expansion into developing markets, new product innovation and aggressive investment benefits, I think this one is worth putting on your radar. It is on mine.