Newell Brands Inc. (NWL, Financial) is a global marketer of a variety of consumer and commercial products. Its brands include Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer's, Coleman, Marmot, Oster, Sunbeam, FoodSaver, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Contigo, First Alert, Mapa, Spontex, Quickie and Yankee Candle. In 2020, Walmart Inc. (WMT, Financial) accounted for 15% of sales.
The company faltered after acquiring Jarden in April 2016 and found itself struggling under a mountain of debt. In hindsight, the company overpaid for Jarden and previous acquisitions and failed to integrate the acquired businesses well. This resulted in a $9.8 billion write-down of goodwill in 2018. The stock dropped from a high of $54 in 2017 to a low of $13 in 2019.
This seems an over-reaction by Mr. Market on both sides! Activist Investors like Carl Icahn (Trades, Portfolio) and Starboard Value swooped in and ousted previous management and bought in new management to right the ship. Newell is in the midst of a turnaround, which is progressing well under the new management team. After selling over $10 billion in assets, it is deleveraging its balance sheet and is now pivoting to growth.
As shown below, cash flow and net income are recovering:
Total debt is being brought down to a more manageable level:
Below is a snapshot of the current balance sheet.
Dividend
The company has maintained its dividend throughout this period of upheaval, highlighting the strong cash generation capability of the business and its commitment to shareholders. The dividend yield is currently 3.57%.
Valuation
Now that new management has gotten solid traction in the turnaround and shown good results, priority needs to shift towards the more challenging task of improving operating margins. In the past, operating margins have been in the low teens. If the operating margins can be brought up into the mid-teens, I expect the stock price to rise back to the $50's.
The chart below compares the price (blue line) to what the price would be at a price-to-operating-cash-flow (P/OCF) ratio of 10 (green line) as well as what the price would be at the median historical P/OCF ratio (purple line). I think a P/OCF ratio of 10 is certainly very feasible in the next year or so with the eventual target of getting back to the median P/OCF ratio of around 13.5 and beyond in the next three to five years.
If the management team keeps on executing well, I believe Newell stock can double with five years while paying a solid dividend. Deleveraging the balance sheet and the recovering economy has created a strong tailwind to help the stock. Guru Carl Icahn (Trades, Portfolio) seems to agree, as he holds over 10% of the stock, so I think shareholders are in for a good deal.
