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Newell Brands (NWL) Down 11.7% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Newell Brands Inc. (NWL - Free Report) . Shares have lost about 11.7% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is NWL due for a breakout? 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 catalysts.

Newell Beats Q1 Earnings, Updates Transformation Plan

Newell Brands reported mixed first-quarter 2018 results wherein the company’s bottom line surpassed the Zacks Consensus Estimate while the top line marginally lagged the same. While this marked the company’s second straight earnings beat, sales figure failed to top the consensus mark after surpassing expectations in the fourth quarter of 2017. Further, management retained its 2018 view.

This Hoboken, NJ-based company posted normalized earnings of 34 cents per share, which outpaced the Zacks Consensus Estimate of 26 cents but remained flat year over year. The bottom line gained from cost savings, favorable pricing, gains from acquisitions and a lower tax rate, compensated by the lost earnings from divested operations, fall in core sales and commodity cost inflation.

On a reported basis, earnings per share came in at 11 cents compared with $1.31 earned in the year-ago quarter.

Net sales of $3,017.4 million fell short of the Zacks Consensus Estimate of $3,039 million as well as declined 7.6% year over year on account of the adverse impact of the last year’s divestitures, net of buyouts. Also, the top line was hurt by the disrupted business of the Baby division along with a considerable inventory destocking in the Writing division’s office superstore and distributive trade channels. Further, core sales fell 3.5%, mainly due to Writing and Baby.

Normalized gross margin contracted 120 basis points (bps) to 33.3% while normalized operating margin declined 190 bps to 8.7% in the quarter under review.

Segment Performance

Live segment net sales inched up 0.4% to $1,071.6 million from the year-ago period. However, core sales decreased 3.1% on account of improvement in Appliances & Cookware, which was more than offset by a high-single digit fall in Baby business.

Net sales at Learn segment came in at $495.4 million, down 13% from the prior-year period. Core sales dropped 14.3%, mainly due to decline in Writing business.

Work segment net sales of $640.7 million grew 4.4% year over year. Also, core sales rose 5.5% on account of continued strength in Waddington and Safety & Security.

Net sales at the Play segment came in at $616.8 million, down 1.8% from the prior-year period. Core sales dipped 2.6% due to fall in Outdoor & Recreation, compensated with sturdy growth registered in Team Sports.

The Other segment net sales of $192.9 million plunged 50.2% from the prior-year quarter on account of the divestitures of the Tools, Winter Sports, Fire Starter and Fire Log plus Cordage businesses. Core sales declined 4.1% due to weakness in Process Solutions, partly offset by improvement in U.S. Playing Cards.

Transformation Plan Update

In line with its Accelerated Transformation Plan, Newell inked a deal to divest its packaging maker, The Waddington Group, to Novolex for roughly $2.3 billion. The transaction, anticipated to close within 60 days, is likely to generate after-tax proceeds of about $2.2 billion, which will be further used in deleveraging and share repurchase. Moreover, Newell adds Jostens and Pure Fishing brands to the list of potential divestitures.

These moves are expected to speed up value creation and transform portfolio to leverage the company’s abilities with respect to innovation, design and e-commerce. Also, it will help improve operational performance, deleverage the balance sheet as well as enhance shareholder value.

The key aspects of this Transformation Plan are restructuring the company into a global consumer products’ entity, valued at more than $9 billion along with major brands in seven consumer segments; offloading non-core businesses that account for nearly 35% of the company’s sales, utilizing $10 billion after-tax proceeds from divestitures and a free cash flow to lower debt plus make share repurchase as well as retaining investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.

The above will likely generate net sales of above $9 billion, boosting shareholder value and financial flexibility. Newell progresses well with its divestiture operations and anticipates the same to be completed by the end of 2019. Thereafter, management projects sales of roughly $9.5 billion with normalized operating margin expansion of more than 15% by 2020.

Other Financial Details

Newell ended the first quarter with cash and cash equivalents of $459 million, long-term debt of $9,623.5 million and shareholders’ equity of $14,130.9 million, excluding non-controlling interests of $36.4 million.

The company reported negative operating cash flow of $401.7 million compared with negative $263.6 million in the prior-year period. During the quarter under review, the company returned $112.6 million to shareholders in the form of dividends.

Outlook

Following the mixed quarterly results, management reiterated its guidance for 2018. Net sales are still projected in the band of $14.4 billion to $14.8 billion with core sales to be flat to down low-single digit rate.

Further, management continues to expect normalized earnings per share in the band of $2.65 to $2.85 and envisions operating cash flow in the range of $1.15-$1.45 billion for 2018. However, the company estimates both the metrics’ outlook to come in at the lower end of the guided range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter. In the past month, the consensus estimate has shifted downward by 8% due to these changes.

Newell Brands Inc. Price and Consensus

VGM Scores

At this time, NWL has a poor Growth Score of F, however its Momentum is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, NWL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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