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Newell Brands (NWL) Up 41.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Newell Brands (NWL - Free Report) . Shares have added about 41.4% 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 Beats on Q3 Earnings, Raises '18 View

Newell Brands reported mixed third-quarter 2018 results, wherein the company’s bottom line outpaced the Zacks Consensus Estimate while the top line lagged. While this marked the company’s fourth straight earnings beat, sales marked the third consecutive miss. Further, management raised normalized earnings per share view for 2018.

Q3 Highlights

The company’s normalized earnings of 54 cents per share outpaced the Zacks Consensus Estimate of 26 cents and remained flat year over year.

Net sales totaled $2,277.2 million, which missed the Zacks Consensus Estimate of $2,323 million. The top line also declined 7.7% year over year on account of the new revenue recognition standard, unfavorable currency rates and decline in core sales.

Further, the company’s sales were impacted by the loss of sales from Toys “R” Us, which recently filed bankruptcy. Notably, core sales dipped 4%. However, the company reported improved core sales trends across all segments and regions, on a sequential basis. Moreover, the Writing business returned to growth during the reported quarter.

The company expects the improved core sales trend to continue in the fourth quarter.

Normalized gross margin contracted 10 basis points (bps) to 35.7% while normalized operating margin expanded 10 bps to 13% in the quarter under review.

Segmental Performance

The Food & Appliances segment’s (which includes Appliances & Cookware Food) net sales declined 11.4% to $722 million. This downside can be attributed to currency headwinds, adoption of new revenue recognition standard and challenges in the Appliances category due to lost sales to a key U.S. retailer. These were partly offset by gains in the Food category.

In the fourth quarter, the company expects core sales trends for the segment to improve sequentially, backed by product launches in Appliances and Cookware.

Net sales at the Home & Outdoor Living segment (which includes Outdoor & Recreation, Home Fragrance, and Connected Home & Security) were $727 million, down 6.8% from the prior-year period. The top line was hurt by the new revenue recognition standard, unfavorable currency, and persistent troubles for Yankee Candle in Europe and lost sales for Coleman at a key U.S. retailer. This was somewhat mitigated with robust growth witnessed in Connected Home & Security, and Home Fragrance U.S. wholesale businesses.

The company expects core sales trends to improve sequentially in the fourth quarter, driven by strength in Connected Home & Security, and growth in Home Fragrance, driven by improved U.S. wholesale channel and stabilization in Europe.

The Learning & Development segment (which includes Writing and Baby) generated net sales of $829 million, which were down 3.9% from the prior-year period. The downside was due to adoption of new revenue recognition standard, unfavorable currency and decline in core sales for Baby, driven by the bankruptcy of Toys “R” Us. However, much of the downside was negated by return to core sales growth in the Writing business.

The company anticipates the Learning & Development segment to return to growth in the fourth quarter, backed further strengthening of Writing business and progress on Baby, despite the impacts of the liquidation of Toys “R” Us.

Transformation Plan Update

The company has made substantial progress on its Accelerated Transformation Plan announced on January 25, 2018. It has been improving operational performance through the divestiture of non-core businesses, deleveraging balance sheet and returning cash to shareholders.

As part of the progress, the company has concluded three divestitures year-to-date, including The Waddington Group, Rawlings Sporting Goods Company and Goody Products, for about $2.6 billion of after-tax proceeds. Furthermore, Newell has right-sized the cost structure and adapted the organizational design to a smaller company footprint. These actions taken in the second and third quarters yielded about 10% reduction in professional headcount on the continuing businesses.

Additionally, the company improved leverage by allocating proceeds to pay down debt and share repurchases. As a result, it exited the third quarter with $2.5 billion lesser debt than the prior year. The company reduced debt by $890 million to $9.6 billion in the third quarter. It also repurchased $511 million worth of shares in the third quarter.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $1,443.6 million, long-term debt of $9,296.8 million and shareholders’ equity of $6,191.9 million, excluding non-controlling interests of $32.9 million.

In the nine months of 2018, the company generated operating cash flow of $181.6 million compared with $23.8 million cash used in operating activities in the prior-year period. In the third quarter, Newell deployed $107 million for the payment of dividends and $511 million for share repurchases.

Outlook

Following the third quarter, the company reiterated its net sales and operating cash flow guidance for 2018 while it raised normalized earnings per share view to reflect discrete tax benefits. Net sales are projected to be $8.7-$9 billion for 2018. It continues to anticipate normalized operating margins between 12% and 12.4% in the second half of the year. Further, it now expects core sales trends to improve sequentially in the fourth quarter.

Normalized earnings per share are envisioned to be $2.55-$2.75, up from $2.45-$2.65 stated earlier. Operating cash flows are still projected to be $0.9-$1.2 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 24.49% due to these changes.

VGM Scores

Currently, Newell Brands has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 looks promising. Notably, Newell Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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