Newell Up 22% in a Month: Is Transformation Plan a Factor?

Newell Brands Inc. NWL is progressing well with the execution of its Transformation Plan through market share gains, point of sale growth, innovation, enhancement of e-commerce and cost-saving plans. Further, the company has outpaced the earnings estimates in six of the trailing seven quarters.

In the past month, this Zacks Rank #3 (Hold) stock has rallied 22.2%, significantly outperforming the industry’s 5.5% growth.

Overview of the Transformation Plan

The key aspect of the Transformation Plan is restructuring the company into a global consumer product entity, valued at more than $9 billion. In this regard, Newell plans to offload its non-core businesses that account for nearly 35% of the company’s sales; utilize $10 billion after-tax proceeds from divestitures and free cash flow to lower debt and make share repurchases as well as retain its investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

In line with its Accelerated Transformation Plan, management has concluded three divestitures, including The Waddington Group, Rawlings Sporting Goods Company and Goody Products, for about $2.6 billion of after-tax proceeds. Newell has also agreed to sell Pure Fishing and Jostens businesses, which are anticipated to generate roughly $2.5 billion after-tax proceeds. While Pure Fishing is expected to be sold to Sycamore Partners, Jostens will be sold to Platinum Equity. Divestiture of these non-core brands is expected to reshape the company’s portfolio and improve operational efficiency.

Further, Newell is exploring strategic alternatives for businesses such as Consumer & Commercial Solutions, and Process Solutions, Team Sports, Beauty, U.S. Playing Cards. The company expects to generate roughly $10 billion in net proceeds from these divestitures, which are anticipated to be completed by the end of 2019.

The execution of the plan will lead to simplification of the company’s operations, which is likely to lower the number of manufacturing facilities by 66%, distribution centers by 55%, brands by 45%, number of employees by 39% and reduce above 30 ERP systems to two by the end of 2019. Management will also focus on right-sizing the cost structure for anticipated smaller net sales, remove stranded corporate expenses and recover the synergies lost through the divestitures.

Notably, Newell improved leverage by allocating proceeds to pay down debt and share repurchases. As a result, it exited the third quarter of 2018 with $2.5 billion lesser debt than the prior year. The company reduced debt by $890 million to $9.6 billion in the quarter. Additionally, Newell deployed $107 million for dividends and $511 million for share repurchases. Further, it intends to buyback more than 40% of its outstanding shares with the divestiture after-tax proceeds.

Bottom Line

While the company’s Transformation Plan appear impressive, Newell has been struggling with strained margins. Absence of earnings related to divested businesses, commodity cost inflation, adverse product mix as well as higher advertising and promotional expenses are impacting margins.

Nevertheless, we expect Newell to overcome margin pressure on the back of its Transformation Plan and cost-saving initiatives. The company’s expected long-term earnings growth rate of 4.9% with a VGM Score of B further demonstrates the stock’s inherent potential.

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The Chefs' Warehouse, Inc. CHEF has an expected long-term earnings growth rate of 19% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ollie's Bargain Outlet Holdings, Inc. OLLI is also a Zacks Ranked #2 stock, which has an impressive long-term earnings growth rate of 25%.

Archer Daniels Midland Company ADM has outpaced the earnings estimates in each of the trailing four quarters, the average being 26.9%. Further, the company carries a Zacks Rank of 2.

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Newell Brands Inc. (NWL) : Free Stock Analysis Report
 
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