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Newell Stock Rises 33% on Robust Transformational Gains

Zacks Equity Research

Newell Brands Inc. NWL stock has advanced 32.5% in the past six months, thanks to significant gains from its transformational efforts. Moreover, the company has also been offloading non-core and underperforming businesses, which is likely to reshape its portfolio and improve operational efficiency.

As a result, shares of the Zacks Rank #2 (Buy) stock has outperformed the industry’s 19.2% decline in the same time frame.



Let’s delve deeper.

Transformation Plan & Other Strengths

Newell has been progressing well with the Accelerated Transformation Plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-saving plans. The key aspects of the Transformation Plan are restructuring the company into a global consumer product entity, valued at more than $9 billion.

It plans to offload non-core businesses that account for nearly 35% of its sales; and utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchase. Further, it expects to retain its investment grade rating and an annual dividend of 92 cents per share through 2019. Over the long term, it targets a dividend payout ratio of 30-35%.

Notably, Newell’s divestiture program is expected to end this year. Currently, the company is pursuing the divestiture of the U.S. Playing Cards business, which is classified as asset held for sale. Proceeds from the sale of the asset have been utilized to reduce debt to strengthen balance sheet. Management now estimates net-debt-to-EBITDA leverage ratio of 4x for 2019, and 3.5x for 2020. This reflects its focus on deleveraging the balance sheet to drive shareholder value.

However, management recently decided to retain the Mapa/Spontex and Quickie businesses, owing to solid prospects. These businesses, which are generating robust cash flow and operating margins, will be considered as continuing operations in the fourth quarter and will be part of its Food and Commercial segment. The businesses are anticipated to be accretive to sales, operating margin, earnings per share and operating cash flow in 2020 and beyond.

Including the aforesaid businesses, the company raised guidance for the current year. For 2019, it projects net sales of $9.6-$9.7 billion, up from the previously mentioned $9.1-$9.3 billion. It expects normalized operating margin of 10.6-10.8% compared with 10.4-10.8% mentioned earlier. Moreover, it anticipates normalized earnings per share of $1.63-$1.68 for the year, up from $1.50-$1.65 stated previously. It projects operating cash flow of $700-$850 million compared with $600-$800 million stated earlier.

However, Newell grapples with soft core sales, which are expected to decline 2-4% in the fourth quarter and in low-single digits in 2019. Lower core sales across most of its segments along with unfavorable currency translations have been weighing on the company’s top line.

Nevertheless, we expect Newell’s efforts — including gains from the aforementioned Transformation Plan — to keep driving its performance. Further, a VGM Score of A coupled with an expected long-term earnings growth rate of 6% speaks of the stock’s potential.

3 Other Key Picks in the Consumer Staples Space

Avon Products, Inc AVP delivered average positive earnings surprise of about 176% in the last four quarters. The stock currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Helen of Troy Limited HELE, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 7.6%.

The Procter & Gamble Company PG has an expected long-term earnings growth rate of 7.5% and a Zacks Rank of 2 at present.

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