Newell (NWL) has not seen positive revenue growth rates for several quarters.
Furthermore, given that its stock has not rallied together with the rest of the market, there could be a satisfactory investment opportunity available here.
For dividend seeking investors, Newell’s 5% yield is covered by its strong cash flows from operations. For less aggressive and well-diversified investors, this investment opportunity could be worth considering.
Revenues are Struggling to Gain Traction
Source: author’s calculations
Newell has been struggling to improve the trajectory of its top-line for some time. Even though Q2 2020 was remarkably poor at negative 15% y/y, the message to note from the graphic is that Newell was already reporting negative revenue growth rates for some time.
We can see that since Q2 2019, Newell’s revenues have been consistently negative.
Furthermore, looking ahead, analysts following the stock are not overly positive over the next several quarters either.
Source: SA Premium Tools
Here we can see that analysts are looking out to Q1 2021 before Newell starts to lap this years’ results and report some good comparisons.
On the other hand, presently, investors’ expectations towards Newell are very low, thus any positive news could see its share price dramatically improve.
In fact, Newell’s CEO Ravi Saligram remains optimistic that Newell is on the right path, asserting that in June Newell delivered flat to modest sales growth versus a year ago.
Source: Newell’s September Consumer Staples Conference
What’s more, Saligram points to Food, Commercial, and Appliance businesses, as areas with strong promise.
More recently, Saligram noted that Newell returned to core sales growth in June through August. Thus, investors should certainly tune into Newell’s Q3 2020 results at the end of this month for an update on this front.
Positive Aspect: Building the Foundation for Strong Cash Flows
Source: Newell’s September Consumer Staples Conference
Newell’s long-term target aims to improve its operating income margin by 50 basis points. As of Q2 2020, its non-GAAP operating margin was 10.2%.
This implies in the event that Newell was able to stabilize or even slightly grow its revenues, it could in time reach $9.5 billion in sales, at which point, its operating income (before interest payments), could reach very close to $1 billion of operating income.
This would put the stock trading for just 7x its operating income, which in the present overvalued stock market would be a very cheap valuation. Having said that, investors should remember that Newell’s balance sheet continues to be overly restrictive and needs to be taken into account too.
Valuation — Newell is Fairly Valued
Once more, on the surface, Newell’s market cap of just $7 billion and appears to be a bargain opportunity. But as dig further, there’s another aspect here that is worthwhile considering.
Consider this, digging into Newell’s 10-K SEC filing, we can see that Newell’s weighted-average interest rate in 2019 was 4.4%.
Then, we know that in May Newell sought an additional $500 million worth of debt at with an interest rate of 4.9% to bolster its cash reserves.
Thus, skeptical investors would not only be correct to believe that Newell is borrowing funds from debt markets to sustain its dividend. But may even be slightly put off that in this low-rate environment, Newell’s debt raises in 2020 are being done at higher rates than its previous average interest rate.
Simply put, creditors are unsure over Newell’s prospects and are requiring a higher interest rate to offset the risk of lending to Newell.
In the same vein, shareholders should similarly consider whether investing in Newell is fundamentally worthwhile as it appears to be the case that investors are consistently waiting around for a turnaround that is forever turning.
Consequently, although looking at Newell’s trailing metrics puts its stock at just 7x free cash flow, investors have to bear in mind just how big the claims on that cash flow actually are.
Including the latest debt raise, Newell’s balance sheet carries close to $5 billion of net debt. Assuming that Newell continues to pay down its debt, even if it were to deploy its total free cash flow of approximately $800 million, Newell would take close to a decade to pay off its debt.
However, as noted above, Newell has no intention of operating debt-free, as it consistently remarks that its optimal range is rough 3x leverage.
Thus, Newell’s dividend payout of approximately $400 million is very much sustainable and covered, implying that Newell’s free cash flow available to pay down its debt could closer to $500 million per year.
In sum, assuming that Newell is able to improve its top-line trajectory, its cash flows may be large enough to both make consistent indentations and pay back its debt, while at the same time continue to pay out its 5% dividend yield.
The Bottom Line
When all is said and done, Newell has been left for dead and forgotten. Yet, this stock may still have some puff left in this cigar butt. Newell is about to update investors with its Q3 2020 results on Friday, 30 October (before the open).
For its Q3 2020 results, investors should look for tangible evidence that Newell has put behind itself its poor H1 2020 performance and that as it looks ahead to 2021, it’s well-positioned to improve its e-commerce operations.
Investors interested in Newell’s 5% dividend can be reassured that its dividend is likely to remain intact.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.