Given the underperformance of Newell Brands (NWL) stock since just before the election (NWL is down roughly 2% as of yesterday’s close vs. an 8%-plus gain in the S&P 500), we want to expand upon a Forum post from yesterday for our members. You can view the Forum post here.
First, we'll briefly explain our analysis of the decline and then pivot into not only why we remain bullish for the long-term but also why we have become incrementally more positive in the short-to-medium term.
As we have explained in recent Weekly Roundups, Newell has been left out of the broader rally as investors rotate into sectors and specific companies that are expected to directly benefit under an improving macro environment and the new administration’s shifting policies (e.g., increased infrastructure spending, de- regulation). Due to the long-term nature of Newell’s strategic transition (e.g., Jarden integration, portfolio rationalization), there is a lack of urgency toward investing in the name immediately, especially with the never-ending flow of funds toward banks, energy and industrials.
Simply put, investors appear content to allocate capital elsewhere while waiting for Newell to provide concrete evidence that the strategic transition has started to bear some fruit, even if that means missing out on an initial move higher.
While we cannot pretend to time a bottom precisely, we aim to invest in quality companies with solid long-term fundamentals that can help build and protect your wealth over time. We remain confident in Newell and believe the company is on track to deliver on its strategic goals -- Newell will exit $1.5 billion of non-core businesses over the next six to 12 months, unlock capital for accelerated debt pay- down, and augment core businesses with smaller complementary brands.
That being said, we recognize that the company remains in the "simplify and strengthen" transition phases, both of which are necessities in the grand plan toward streamlining the portfolio with only higher-margin, higher-growth brands. Throughout this period, core sales growth is expected to remain between 3% and 4%, as per the company’s recent guidance (likely through next quarter), but this process will pave the way for the "accelerate" phase, wherein sales growth will advance toward 3%-5% and EPS growth will evolve from high-single digits to mid-teens to strong double- digits.
CEO Mike Polk reiterated this view at last week’s CAGNY conference while also confirming combined savings/synergy targets of $800 million by early 2019. While he expressed confidence in delivering upside to the $500 million synergy target specifically, Polk remained conservative, silencing expectations for an official target increase. This is likely why we saw some initial weakness in the name last week, but we note that management is smart to manage expectations (via conservative guidance) given the breadth and depth of its transition plans, looking to under- promise and over-deliver. As investors were given time to let the commentary sink in, the stock is now up roughly 5% since the conference presentation, indicating improving sentiment and some willingness by investors to allow management space to execute on their long-term plans.
Building off of this momentum, the company announced two strategic, tuck-in acquisitions yesterday -- Sistema Plastics in the food storage category and Smith Mountain Industries in the home fragrance category (makers of WoodWick Candle branded products, which will complement Yankee Candle). The $570 million combined price-tag (funded from cash on hand separate from planned divestiture proceeds) is a reasonable price to pay for two companies that a) are growing well above Newell's core sales growth rate, b) offer attractive margins, and c) should be immediately accretive to EPS (and management had identified these names as on their "wish list").
In addition, there will be limited integration risk as Sistema will be managed separately from the broader company and WoodWick’s concentrated focus and relatively small top-line fit perfectly as a tuck-in. Specifically, Sistema will also provide the added benefit of access to plastics manufacturing capabilities outside of China.
Perhaps most importantly, regardless of the new brands’ actual impact toward Newell’s sales, these acquisitions serve as a way for management to exude incremental confidence in the Jarden integration and portfolio rationalization process. We were not surprised to see the market react positively in yesterday’s session (and in today’s early trading) and believe management’s willingness to pounce, opportunistically, on strategic acquisitions at this time underscores the company’s integration and execution capabilities. This vote of confidence could just be the soft-catalyst needed to reignite investor optimism in Newell.
As such, although we recognize that near-term core sales growth will likely continue to be weighed down by clean-up initiatives across the portfolio, we have become incrementally more bullish in the short term. Following this string of positive news, we believe investors will look to take advantage of the recent selloff in NWL in order to jump into a name with visible growth and synergy benefits that support a long-term investment thesis.
Over time, we expect greater investment, the completion of portfolio rationalization, and margin growth to lead to long-term share gains for those who are willing to see the strategy through until the end.