Newell Rubbermaid Inc

Newell Rubbermaid Inc.

SUMMARY

SUMMARY DATA

OVERVIEW

Atlanta, GA-based Newell Rubbermaid Inc. is a global manufacturer and marketer of consumer and commercial products, including Sharpie, Paper Mate, Parker, Waterman, Rubbermaid (writing instruments, storage containers), Calphalon (cookware), Graco (juvenile products), Levolor, Vise-Grip, Irwin (hardware, household products, and tools), and Lenox. The products cater to indoor and outdoor organizations and include storage and cleaning products, stationery, art supplies, hand tools, power and industrial tool accessories, manual paint applicators, cabinet hardware, propane torches, drapery hardware and window treatments, aluminum and steel cookware, hair care accessory products as well as infant and juvenile products. Acquisitions played a major role in the company’s growth strategy. Currently Newell has 5 reporting segments which are discussed below:

 Home Solutions – The segment, which includes brands such as Rubbermaid®, Calphalon®, Levolor® and Goody®, contributed approximately 27% to 2014 revenues.

 Writing – This segment contributed nearly 30% to 2014 revenues and includes brands such as Sharpie®, Paper Mate®, Expo®, Prismacolor®, Parker® and Waterman®.

 Tools – Tools comprising brands like Irwin®, Lenox®, hilmor and Dymo® industrial have contributed about 15% to the total revenue.

 Commercial Products - Rubbermaid Commercial Products® and Rubbermaid® Healthcare are covered under this segment, which have generated approximately 15% of the total revenue.

 Baby & Parenting - Graco®, Aprica® and Teutonia® brands are sold under this segment. The segment contributed nearly 13% to the company’s total revenue.

Apart from this, the company has divided its business operations in 5 different geographical regions. Its United States region generated the major portion of revenues in the quarter, which was approximately 69%, while Asia-Pacific, Canada, Latin America and Europe, Middle East & Africa contributed nearly 7%, 5%, 7% and 12%, respectively.

REASONS TO BUY

 Strong Brand Portfolio: Newell Rubbermaid is one of the leading manufacturers of home and office products in the U.S. The company also possesses a strong portfolio of well-established brands, such as Sharpie, Paper Mate, Dymo, Expo, Waterman, Parker, Irwin, Lenox, Rubbermaid, Levolor, Graco, Calphalon and Goody. As a result, Newell Rubbermaid can expect a favorable turn once the market fully recovers.

 Concentrating on Core Busines Activities: Newell Rubbermaid has transitioned well into a new operating model adopted a year ago to optimize its capital allocation and concentrate on core business activities. As a result, the company is now building momentum in its business while witnessing accelerated growth and margin expansion. The new operating model hovers around 2 core operations – brand development and commercial delivery. While brand development focuses on building a strategic growth agenda for its brands and categories through R&D, designing, insights and marketing plan; under the delivery function, the company has consolidated into 5 operating segments, established a global supply chain and rolled out a one-company Customer Development Organization. We believe these actions provide the company with an edge to grow through innovation, brand augmentation and by availing opportunities in emerging economies.

 Expansion of Project Renewal Program to Attract More Savings and Investments: Newell Rubbermaid’s Project Renewal Program remains on track to achieve annual cost savings of nearly $270 to $325 million from the first two phases of the program by mid-2015. Recently, the company announced the third phase of the program, which is primarily focused on saving costs in the areas of procurement, through year-end 2017, by reducing the complexity of its business and simplifying the manufacturing and distribution, and through further overhead reduction. The extended program targets to save an additional $200 annually process of procuring products. This brings the cumulative cost savings under the program to $470–$525 million annually by the end of 2017. The company expects to use the savings from the new program to strengthen its brand position in the fast growing emerging markets of Latin America and Asia.

 Portfolio Management to Amplify Growth: Apart from strategically enhancing its financial results, Newell Rubbermaid also remains keen on strengthening its portfolio by investing in its key segments, reducing activities with marginal profitability, and exiting certain businesses and markets. In this context, the company recently acquired Ignite Holdings LLC and bubba brands inc., bringing the Contigo, Avex and bubba brands under its ambit. Together, these acqusitions are aniticpated to enhance the company’s annual net sales by over $175 million and firm its position in the fastest growing on-the-go hydration and thermal bottle market in North America. Further, to curb on its non-perfroming assets the company has decided to sell its Endicia online postage and Calphalon retail outlet stores and kitchen electrics businesses. Along with strengthening its portfolio, these steps will help sharpen focus and create a faster growing, higher margin and more profitable company.

 Enhancing Shareholder Return: Newell Rubbermaid boasts of a strong balance sheet that coupled with ample free cash flow, offers it the financial flexibility to enhance shareholder return and drive future growth through value-added investments aimed at accelerating growth and expanding margin. The company’s commitment toward enhancing shareholder value is evident from its robust dividend payment history and share repurchase programs. During 2014, the company’s cash generation ability allowed it to return nearly $546 million to shareholders through dividend payouts and repurchases. The company’s board of directors declared a quarterly dividend of $0.17 per share and bought back 2.8 million shares in the fourth quarter. Additionally, the company recently expanded and extended its share repurchase program to authorize the repurchase of additional $500 million worth of shares by the end of 2017 and raised its quarterly dividend rate to $0.19 per share.

REASONS TO SELL

 Threat from Currency Devaluation in Venezuela and Argentina: In January, the Venezuelan government shocked the world by devaluing its currency by another 44%, which marked the second devaluation within less than a year. Newell, which derives significant revenue from the country will find it difficult to maintain profitability if the Venezuela government restrains the pricing decision of companies to offset a possible rise in raw material prices. The company is facing a similar situation in Argentina, which is expected to devalue its currency by approximately 50% this year.

 Depending on Few Target Customers: The company is heavily dependent on a handful of customers, including large discounters, department stores, home centers, warehouse clubs, and office superstores. The company’s principal customers continuously evaluate which product supplier is best for use. This considerably reduces Newell Rubbermaid’s pricing power against the giant retailers, thereby exerting pressure on margins and limiting profitability.

 Competitive Pressure May Result in Loss of Market Share: Newell Rubbermaid faces intense competition from numerous manufacturers and distributors of consumer and commercial products, such as Jarden Corp., Cooper Industries Ltd. and Avery Dennison Corp. In such a competitive environment, the company has to focus on pricing, big consumer brands, introduction of new products, and customer service to retain its market share in the industry.

RECENT NEWS

Newell’s Solid Financials Drive a 12% Dividend Hike – Feb 12, 2015

Newell Rubbermaid announced a 12% increase in its quarterly dividend to $0.19 per share from $0.17. This dividend, which is payable on Mar 13, 2015 to stockholders of record as on Feb 27, marks Newell’s 5th dividend hike over the past 4 years.

Newell Beats Q4 Earnings by a Penny, Provides 2015 Outlook – Jan 30, 2015

Newell Rubbermaid Inc. posted fourth-quarter 2014 adjusted earnings of $0.49 a share that came a penny ahead of the Zacks Consensus Estimate and rose 6.5% year over year.

The increase in the bottom line was due to higher core sales, increased gross margin, contribution from acquisitions and reduced share count, partly offset by increased tax rate, unfavorable foreign currency translations and heightened advertising and promotion costs.

On a reported basis, including one-time items, the company reported earnings of $0.19 per share, down over 53% from the prior-year quarter earnings of $0.41 per share.

Net sales rose 4.1% to $1,526 million from the year-ago quarter and also surpassed the Zacks Consensus Estimate of $1,520 million. Core sales, excluding a negative impact of 320 basis points (bps) from foreign currency translation and 400 bps from acquisitions, climbed 3.3%, reflecting sales growth across Writing, Tools and Commercial Products segments.

Writing net sales remained flat with last year at $418.2 million, while core sales increased 5.7%; Tools segment net sales increased 3% to $227.3 million, whereas core sales grew 7.5%; and Commercial Products net sales jumped 5% to $213 million, while core sales grew 6.7%.

Meanwhile, sales for the Home Solutions segment rose 10.8% to $458.6 million due to contributions from recent acquisitions, while core sales fell 1.8%. Net sales for Baby & Parenting segment fell by a marginal 0.2% to $208.9 million but core sales grew 0.7%.

Newell’s gross profit increased 6% year over year to $574.1 million whereas gross margin expanded 60 bps to 37.6%. Adjusted gross margin increased 70 bps to 37.7% owing to improved productivity, pricing and favorable segment mix, offset by input cost inflation and negative foreign currency translations.

Adjusted operating income rose 14% year over year to $204.6 million while operating margin expanded 120 bps to 13.4%, despite a 60 bps increase in advertising and promotion expenses.

Full-Year Synopsis

For 2014, the company’s adjusted earnings came in at $2.00 per share, up 9.9% from 2013 and in line with the Zacks Consensus Estimate. Revenues for the year increased 2.1% to $5,727 million, while core sales grew 3%. The company’s top line fell slightly short of the Zacks Consensus Estimate of $5,729 million.

Other Financial Details

Newell ended the year with cash and cash equivalents of $199.4 million, long-term debt of $2,084.5 million, and shareholders’ equity of $1,854.9 million.

As of Dec 31, 2014, the company generated operating cash flow of $634.1 million, incurred capital expenditures of $161.9 million and paid dividend of $182.5 million. During the fourth quarter, the company expanded its existing share buyback program, authorizing repurchase of additional $500 million worth of shares through the end of 2017.

Other Developments

The company successfully completed the acquisition of Ignite Holdings LLC and also announced the acquisition of bubba brands inc. in October.

Further, the company announced the next phase of its Project Renewal Program, primarily focused on saving costs in the areas of procurement, manufacturing and distribution, and through further overhead reduction. As part of the extended program, the company expects to save an additional $200 million annually by reducing the complexity of its business and simplifying the process of procuring products.

The extended program is expected to generate annualized cost savings of nearly $470 to $525 million by the end of 2017. The company intends to use the savings from the program to strengthen capabilities and its brand position in the fast growing emerging markets of Latin America and Asia.

On the other hand, the company anticipates cumulative costs of $540 to $575 million pretax from the extended program, including cash costs of $510 to $540 million.

Further, the company remains on track to achieve annual cost savings of nearly $270 to $325 million from the first two phases of the Project Renewal program by mid-2015.

Outlook

Following the year-end results, the company revised its outlook for 2015 based on expectations of core sales improvement and the negative impact of foreign currency translations. Newell now expects full-year adjusted earnings in the range of $2.10–$2.18 per share, excluding expenses worth $80–$120 million related to Project Renewal restructuring and other restructuring activities as well as other project costs. Further, the company expects a negative impact of $0.31–$0.33 on earnings per share from foreign currency translation.

Further, Newell projects core sales growth of 3.5%–4.5%. Net sales growth is expected to be 3%–4%, including about 4%–5% currency impact and nearly 3.5%–4.5% acquisition-related impacts.

VALUATION

Newell Rubbermaid’s current trailing 12-month earnings multiple is 19.8x in line with the industry average and compared with 19.2x for the S&P 500. Over the last 5 years, Newell Rubbermaid’s shares have traded in the range of 7.7x to 19.0x trailing 12-month earnings. Moreover, the stock is trading at a discount to the industry average based on forward earnings estimate. Our target price of $42.00, 19.5x 2015 EPS, reflects this view.

Key Indicators

Earnings Surprise and Estimate Revision History

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of NWL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.3%, Neutral - 76.8%, Underperform – 7.2%. Data is as of midnight on the business day immediately prior to this publication.

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