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Should Newell Brands Be at the Top of Your Christmas List?

Tuesday, Dec 12th, 2017

The search for undervalued companies continues to be tough in this expensive market. One company I noticed the other day which looks appealing is Newell Brands Inc. (NWL). The company caught my attention after seeing a current price of $31.16 and a 52-week high of $55.08. That is a decline of 43.4%. I like to look at companies that go on sale and maintain strong fundamentals. While this company appears to be on a clearance sale, let’s take a closer look at the fundamentals to see if it is worth further research.

Newell Brands is in the consumer goods sector and the houseware and accessories industry. I was excited by this company, because we currently do not have anything like it in the portfolio. It has popular brands that include Yankee Candle, Rubbermaid, Coleman, Crock-Pot, Mr. Coffee, Graco, Jostens, Rawlings, Sharpie, Elmer’s Glue, and many others.

Looking at the valuation ratios, many of them compare favorably to the industry average. The current Price/Earnings Ratio is 11.95, which is below the industry average of 26.94. This is a positive as we like to see valuation ratios below the industry average as it shows we are getting a good value for that given metric. Price/Sales of 1.0 is a great value compared to the industry average of 3.2 and Price/Cash Flow of 8.1 is also below the industry average of 20.4.

An area of concern would be the company’s Price/Tangible Book value as it is not material. This can be attributed to the company having more than $10.5 billion worth of goodwill on the balance sheet. This is a result of accounting practices that come with the company acquiring the different brands it now holds in its portfolio. If I were to invest in this company I would spend time looking at each acquisition to see when it occurred and how much goodwill can be attributed to it.

With the decline in the stock price, Newell now pays an attractive dividend of 2.98%. The company only uses 32.4% of its earnings to pay out that dividend. This provides me with a lot of confidence that the dividend is sustainable and could even see an increase over the coming years.

Over the last 12 months, sales have seen an increase of 41.6% and EPS has risen 381.0%. These numbers seem out of the ordinary for a developed business, like Newell. Most likely the growth rates can be attributed to accounting practices and I would recommend looking at the 10-Q and 10-K to see what has happened over the last 12 months.

Turning to the balance sheet, a current ratio of 1.5 compares favorably to the industry average of 1.2 and shows the company has liquidity. Total Debt/Equity of 90.1% is better than the industry average of 149.8%. It is also at a reasonable level, but I would not like to see the company increase its debt level much further. Newell increased its debt level from $3.0 billion at the end of 2015 to $11.9 billion in 2016. The current debt level sits at $11.5 billion. I do question why the company increased its debt load in 2016 and would want to look for that information in the conference calls or SEC filings.

Looking forward to December 2018 and using a forward multiple of 16.5, estimated GAAP EPS of $2.52 gives us a target sell price of $41.58. This would be an estimated return of 33.4%, which would place the company in our buy range. While this company has many positives, I would recommend further research into the key areas I pointed out before buying this company.

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