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Why Is Newell Brands (NWL) Up 25.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Newell Brands (NWL - Free Report) . Shares have added about 25.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Newell Brands due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Newell Brands Beats Q3 Earnings & Sales Estimates

Newell Brands posted better-than-expected third-quarter 2020 results, wherein both bottom and top lines improved year over year. Despite the challenging economic situation surrounding the coronavirus outbreak, results gained from solid sales growth, driven by robust consumption patterns, improved margins and strong cash flow.

Going ahead, management foresees healthy demand in a few high-growth categories. Also, it is on track with product innovation in sync with the changing consumer trends, increased investments in omnichannel capabilities and efforts to lower organizational expenses. 

Q3 Highlights

Newell’s third-quarter normalized earnings per share were 84 cents, which outpaced the Zacks Consensus Estimate of 44 cents. However, the metric advanced 15.1% from 73 cents earned in the year-ago period.

Net sales grew 5.1% year over year to $2,699 million and surpassed the Zacks Consensus Estimate of $2,490 million. The uptick can be attributable to solid core sales to the tune of 7.2% as majority of business units and all regions witnessed core sales growth. On the flip side, unfavorable currency and divestitures remained headwinds.

Normalized gross margin contracted 90 basis points (bps) to 33.9% due to the adverse impacts of business unit mix. Meanwhile, normalized operating margin expanded 220 bps to 14.9%, driven by strong top-line growth, stringent cost measures, cost savings from restructuring actions, FUEL productivity savings and lower organizational expenses.

Segment Details

The Appliances & Cookware segment (including Writing and Baby) recorded net sales of $479 million in the third quarter, up 11.4% from the prior-year quarter. This is mainly due to the segment’s core sales growth of 17%, which more than offset unfavorable foreign currency.

Net sales in the Home & Outdoor Living segment (including Outdoor & Recreation, Home Fragrance, and Connected Home & Security) totaled $574 million, up 18.6% from the prior-year period. The segment’s top line was aided by favorable currency impacts and core sales growth of 19.5%.  This was somewhat offset by the exit of 76 underperforming Yankee Candle retail stores in the first nine months of 2020. Also, both Food and Home Fragrance businesses witnessed core sales growth.

The Learnings and Development segment recorded net sales of $728 million, which fell 11.7% from the prior-year quarter. This resulted from a 9.5% decline in core sales stemming from delays in the reopening of schools and offices that hurt the Writing business unit.

Net sales in the Commercial Solution segment were $535 million, up 12.6% from the prior-year period. Core sales growth of 13.3%, driven by solid performance in both Commercial and Connected Home & Security business categories, contributed to the segment’s top line.

The Outdoor and Recreation segment recorded net sales of $383 million, which increased 7.6% from the prior-year quarter. This resulted from 8.1% core sales growth, which more than offset currency headwinds.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $858 million, long-term debt of $5,794 million and shareholders’ equity of $3,726 million, excluding non-controlling interests of $24 million.

In the nine months ending Sep 30, 2020, the company generated operating cash flow of $820 million. That said, it has liquidity of more than $2 billion, which is likely to help it stay afloat amid this crisis.

Looking Ahead

As a result of clearer visibility of the COVID-19 situation, management has issued guidance for 2020 and the fourth quarter. For fourth-quarter 2020, the company expects normalized earnings of 40-46 cents, with operating margin contraction of 80-140 bps to 9.9-10.5%. Further, net sales are envisioned to be $2.5-$2.6 billion, with core sales in the range of flat to low-single-digit growth.

The company anticipates 2020 sales to be $9.2-$9.3 billion, with core sales likely to decline in low-single digit. Normalized earnings are forecasted to be $1.63-$1.69 per share, with normalized operating margin likely to be in the range of flat to 20-bp contraction to 10.6-10.8%. Also, cash flow is estimated to be $1.1-$1.2 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Newell Brands has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise Newell Brands has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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