Newell Rubbermaid Inc. (NWL - Analyst Report) , the producer of Sharpie pens and Rubbermaid containers, remains on our Neutral list as the company continues to post robust quarterly results, maintains its fiscal 2012 forecasts and continues to grow through its ongoing Project Renewal program. However, we remain concerned regarding the increasing material costs, intense competition and slowdown in housing and remodeling market.
Second quarter 2012 earnings of 47 cents per share at Newell exhibited an improvement of 4.4% from the year-ago quarter as well as the Zacks Consensus Estimate of 45 cents per share. Earnings gained mainly from the positive impact of pricing and productivity and lower structural selling, general and administrative expenses as a percentage of sales, partially offset by higher input cost inflation.
It is to be noted that the company has a history of beating Zacks consensus numbers. The company has consistently posted positive surprises in the past several quarters. The average positive surprise in the trailing four quarters comes to 5.82%.
Following the improved second quarter results, management has reiterated its outlook for fiscal 2012. Management continues to anticipate core sales growth of 2% to 3% and adjusted earnings in the range of $1.63 to $1.69 per share for fiscal 2012.
Moreover, Newell expects an improvement of 20 basis points in operating margin during fiscal 2012. In addition, the company expects incremental revenue of $55 - $65 million in the fiscal with the completion of its ongoing European Transformation Plan.
Newell’s ‘European Transformation Plan’ is mainly focused on revamping its European organizational structure and processes in order to integrate certain operating activities, leverage the benefits of scale and contribute to an effective implementation of enterprise resource planning program in the region. The company expects the plan to be completed by the end of 2012.
Additionally, the company’s ongoing ‘Project Renewal Program’ is a boon, targeting to save costs within the range of $90 million - $100 million. The Project Renewal initiative will help reduce the complexity of the organization and increase investments in the most important growth areas within the business. The company plans to fund the initiative through savings from reducing structural selling, general and administrative expenses.
On the flip side, the company operates in a competitive environment and strives to maintain its market share, actively competing with numerous manufacturers and distributors of consumer and commercial products, like Jarden Corp. , Cooper Industries Ltd. and Avery Dennison Corp. (AVY - Analyst Report) . The company’s primary traits to compete in the environment include focus on pricing, big consumer brands, introduction of new products, and customer service.
Further, Newell’s results may be adversely affected by its substantial exposure to the international market. Newell may have to either raise prices or contract profit margins in locations outside the U.S., if the foreign currencies weaken against the U.S. dollar. A rise in the company’s product price to offset increasing input cost may have a direct impact on its product demand.
While our recommendation on Newell’s rides on the various positives mentioned above, threats of competition and foreign currency translation, keep us on the side lines. The company retains a Zacks #3 Rank, implying a short-term Hold rating. This is also consistent with our long term Neutral view on the stock.