It’s hard to find organic growth in consumer products, but I believe Newell Brands Inc. (NWL, Financial) just might find a way to do it. Newell is a manufacturer of many popular and iconic consumer brands such as Rubbermaid, FoodSaver, Calphalon, Sistema, Sharpie, Paper Mate, Dymo, EXPO, Elmer’s, Yankee Candle, Sunbeam and Mr. Coffee
The company has a long operating history dating back to 1903, but the current entity was largely formed by a mega-merger transaction with Rubbermaid and Graco in 1999. It had a rough start after that transaction, and years later Businessweek called it a “merger from hell” as Newell shareholders lost 50% of their value and the company had to write off $500 million in goodwill value in 2002.
Since those tumultous post-merger days and through high volatility over the years, the stock has grown to a $8.3 billion market capitalization and generates over $10 billion in annual revenues.
About the business
Newell operates in five segments: Commercial Solutions, Home Appliances, Home Solutions, Learning and Development and Outdoor and Recreation.
The commercial solutions division provides commercial cleaning and maintenance solutions, closet and garage organization products, hygiene systems, home security and smoke and carbon monoxide alarms products. Brands include First Alert, Mapa, Quickie, Rubbermaid and Spontex.
The home appliances segment provides small kitchen appliances under the Crock-Pot, Mr. Coffee, Oster and Sunbeam brands.
The home solutions division provides food and home storage, fresh preserving, vacuum sealing, gourmet cookware, bakeware, cutlery and home fragrance products. Brands include Ball, Calphalon, Chesapeake Bay Candle, FoodSaver, Rubbermaid, Sistema, WoodWick and Yankee Candle.
The learning and development segment offers writing instruments such as markers, highlighters, pens and pencils as well as art products, adhesive and cutting products and labeling solutions. The division also hosts baby gear and infant care products. Brands include Aprica, Baby Jogger, Graco, NUK, Tigex, Dymo, Elmer’s, EXPO, Graco, Mr. Sketch, NUK, Paper Mate, Parker, Prismacolor, Sharpie, Waterman and X-Acto.
The outdoor and recreation segment provides camping and outdoor related products under the Campingaz, Coleman, Contigo, ExOfficio and Marmot brands.
Financial review
Newell reported good first-quarter 2022 earnings results with sales increasing 4.4% and core sales increasing 6.9%. Cores sales is the company’s term of organic growth. The gross margin was 31.0% compared with 31.9% in the prior-year period as the company noted significant headwinds from inflation, particularly related to resin, sourced finished goods, transportation and labor.
The company has historically been levered at times as it used debt to fund its acquisitions. Currently the leverage ratio is down to 3.1 due to strong free cash flow and divestitures. Free cash flow over the past three fiscal years has been $779 million for 2019, $1.17 billion for 2020 and $595 million for 2021.
Valuation
The company provided guidance for the 2022 calendar year, which included organic sales growth in the range of 0.0% to 2.0% and earnings per share in the range of $1.85 to $1.93. Most Wall Street analysts have come in at the high end of that range, with consensus EPS estimates of approximately $1.91. If the company achieves that, it’s priced remarkably cheap at only 10 times forward earnings. The current enterprise-value-to-Ebitda ratio based on estimated 2022 Ebitda is roughly 7.
To arrive at a fair value estimate for this stock, I used the GuruFoucs DCF calculator, plugging in 2022 consensus EPS estimates of $1.91 as the starting point and projecting 6.0% long-term growth. This results in a fair value estimate of approximately $28.00.
Newell’s dividend yield is currently 4.70%, which is substantially above market averages. The payout ratio is below 50%, and the company generates enough free cash flow to support the dividend.
Guru trades
Gurus who have purchased Newell stock recently include Richard Pzena (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Gurus who have sold or reduced their positions include Carl Icahn (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Conclusion
It appears Newell is very undervalued at this time, based on my estimates. It’s not a high growth stock by any means, and its historic volatility is also not a selling point, but with mid-to-high single digit cash flow and operating income growth, I believe the company should be able to create above-average shareholder returns, particularly when considering the high dividend yield.
