Newell Brands Inc. (NWL, Financial) hit 30-year lows recently. The shares have dropped from a high of $54.89 in August 2016 to around $6 currently, a drop of over 85%, despite the presence of high-roller activist investors like Carl Icahn (Trades, Portfolio) in the stock.
Icahn currently owns 6.14% of the company, though the guru has been dialing down his stake after sustaining heavy losses. Another large value investor is fund manager Richard Pzena (Trades, Portfolio), whose fund owns 12.66% of the company. Pzena's fund is doing the opposite of Icahn and has been building up its stake.
Newell Brands has an Altman Z-Score of 0.59, indicating it is in the Distress Zone. This means there is the potential for bankruptcy in the next two years. The overall financial strength of 4 out of 10, however, does not look too too bad. Debt is quite high, so obviously we have to look at the debt structure carefully.
With operations around the world, Newell owns brands such as Sharpie, Rubbermaid, Yankee Candles, Oster, Mr. Coffee and Coleman.
Source: Newell website
On April 15, 2016, Newell Rubbermaid acquired and merged with Jarden, forming a $16 billion company called Newell Brands. Under the terms of the agreement, Jarden shareholders received, for each Jarden share, $21 in cash and 0.862 shares of Newell Rubbermaid stock at closing. Initially lauded as transformative and combining iconic brands like Yankee Candles, Crock-Pot, Sharpie, Marmot and Graco, the merger was viewed positively by the market. Newell exceeded earnings expectations in October 2016 with 3% organic sales growth, leading then-CEO Michael Polk to express confidence in the company's performance and transformation.
However, the situation deteriorated rapidly. Sales trends worsened, falling below expectations in February 2017, leading to a drop in stock price from its peak of $50 per share to the low $40 range. The instability continued, and in February 2018, activist investor Starboard, working with former Jarden CEO Martin Franklin, who was on the board of directors, attempted to replace the entire board. The merger was criticized for "critical missteps," and by May 2018, it became evident that mistrust between the former Jarden and new Newell leaders was a significant factor in the dispute at the board level.
In March 2018, another activist billionaire investor muscled into Newell. Icahn expressed his belief that Newell is undervalued and revealed that he purchased the company's shares for around $25 per share. He stepped in as a white knight initially, supporting management and opposing Starboard. Martin Franklin, the former Jarden chairman, resigned as a director after failing to oust Polk. Starboard also exited its Newell investment in 2018.
The following chart shows the destruction of value wrought by Newell's acquisition of Jarden. The company's market cap is one-third of where it was before the acquisition.
Under activist pressure, Newell went on to divest many brands, such as sports brand Rawlings, its connected home security business and storage brand Waddington's, among others. However, the stock continued to drop.
A change of leadership then took place with Polk being replaced by Ravi Saligram, a turnaround specialist, in July 2019. Saligram pushed streamlining Newell's extensive business operations and intensifying product innovation for the company's most crucial brands, even in the face of the crippling impact of the Covid-19 pandemic in 2020. Between July 29, 2019 (the day before Saligram assumed his position) and May 3, 2021, the stock surged by approximately 107% as consumers increased their purchases of Newell's products while confined to their homes during the pandemic. However, the stock has since retreated to a level below when Saligram took office. This decline occurred as consumers started leaving their homes and rising raw material costs put pressure on Newell's profit margins. Saligram retired this year and was replaced by former Chief Financial Officer Chris Peterson, who had joined the company in 2018 after working for Polo Ralph Lauren and Procter & Gamble (PG, Financial). Peterson stated in a recent press release, "In spite of the challenging market conditions, we see significant potential to achieve profitable growth by strengthening our core brands and implementing further strategic measures to enhance our operational efficiency."
Debt analysis
Debt is comprised of the following at the dates indicated (in millions):
June 30, 2023 | |
| 4.00% senior notes due 2024 | 196 |
| 4.875% senior notes due 2025 | 497 |
| 3.90% senior notes due 2025 | 47 |
| 4.20% senior notes due 2026 | 1,979 |
| 6.375% senior notes due 2027 | 479 |
| 6.625% senior notes due 2029 | 479 |
| 5.375% senior notes due 2036 | 417 |
| 5.50% senior notes due 2046 | 658 |
| Revolving credit facility | 530 |
| Commercial paper | — |
| Receivables facility | 66 |
| Other debt | 2 |
| Total debt | 5,350 |
| Short-term debt and current portion of long-term debt | (597) |
| Long-term debt | 4,753 |
On March 20, S&P Global downgraded Newell's debt rating to BB+. In February, Fitch Ratings downgraded the company's debt rating to BB.
Overall, the debt maturities are spread out, with the largest tranche maturing in 2026. According to GuruFocus calculations, the effective interest rate Newell is paying on its debt is 4.98%. It is obvious that as the various tranches of debt matures, the company will have to refinance it at much higher rates. This fact is likely scaring the market.
On the other hand, I doubt the Federal Reserve will not be able to sustain current high interest rates beyond 2024, less it strangulates the economy. Therefore, I think interest rates will have to moderate sooner rather than later (and especially if inflation continues to moderate). This means investors' concern on the debt burden, though justified, may be overdone. Toward this end, Newell is already taking action as it cut its dividend to conserve cash. The dividend has been cut to 28 cents per quarter from 70 cents previously. According to a May statement, the company said it is "deliberately resetting its capital allocation priorities and right-sizing the dividend to fund high-return internal supply chain consolidation investment opportunities, while enabling faster de-leveraging of the balance sheet and providing additional financial flexibility.” Even after the cut, the dividend yield is a decent 4.12%.
Valuation
GuruFocus is tagging Newell as a possible value trap, given it is trading so far below historical norms.
It is a low predictability stock with low growth and momentum characteristics. However, profitability is mediocre. The saving grace is the very low price of the stock. It is definitely a contrarian pick.
| GF Valuation |
Possible Value Trap, Think Twice | |
| GF Score | 60 | of 100 |
| Predictability Rank | 1 | of 5 |
| Growth Rank | 2 | of 10 |
| Financial Strength | 4 | of 10 |
| Valuation Rank | 10 | of 10 |
| Quality Rank | 4 | of 10 |
| Momentum Rank | 2 | of 10 |
| Profitability Rank | 6 | of 10 |
One reasonable way of valuing Newell is by using the median price-sales ratio. Valuation using the ratio is a rough measure, but it can be useful in situations where undervaluation looks excessive and where the company has been through a lot of change, so earnings, cash flow and book value are not reliable. This valuation method assumes the stock valuation will revert to its historical (e.g., 10-year or longer) mean.
The reason I use the price-sales ratio instead of the price-earnings ratio or price-book ratio is because it is independent of the profit margin and can be applied to a broader range of situations. However, the method implicitly assumes that over time the profit margin will return to historical levels. If the profit margin has permanently declined, this method may overestimate the company's value.
Newell's 20-year median price-sales value is 1.12 while its current ratio is just 0.28. This denotes a wide margin of safety. The stock could more than triple to reach a price-sales fair value. I chose a 20-year period in this instance as it incorporates a variety of different economic environments, including two recessions.
Conclusion
Newell as a company is badly battered and looks like it is on the ropes. However, it does not look like the company is headed for imminent bankruptcy. The dividend cut has also shaken out the investor base. It is a company only a contrarian would love.
The Jarden acquisition was done at too high a price by an empire-building CEO, which destroyed value. This was followed by the Covid-19 pandemic, high inflation and now high interest rates. Newell has been through two CEOs since that flawed acquisition and is now headed by a third leader. However, the company has gone through one previous "rough" merger in 1999, when it acquired Rubbermaid. While it went through a tough few years integrating Rubbermaid due to a clash of cultures, the company came through it. It is now going through a similar trial by fire, coping with a high debt load and inflaton. However, the company has "good bones," as represented by its well-known and trusted brands. It needs to get its operating margin back up and to pay down the accumulated debt. I think the chances are good that it can do that, though I am not looking for a quick turnaround. I think it is going to take three to five years of hard work and some luck. However, the stock can be a multi-bagger if management can execute competently and the economy does not get too bad. That being said, I think new investors should wait until some green shoots are evident and the stock begins to show some positive momentum.
