Newell Rubbermaid's Compelling Value

Newell Rubbermaid (NWL) is a familiar stock on my site. Back in August of 2008, we thought it was still a bit too pricey at $19/share. But starting in December of 2008, it began to look attractive, having reached $9/share. A couple of months later, it became a downright steal, at under $5/share. Last week, however, the stock rose 20% in one day, as the company reported its first quarter results for 2009. At its current price of $11/share, does it still represent good long-term value?

While not nearly the compelling buy it was at $5/share, NWL still appears to offer investors the opportunity to buy in at a discount. Operating cash flow for this year is expected to come in around $400 million, while the company trades for just $3 billion. Management expects earnings of between $1 and $1.25 per share, giving it a forward P/E under 10. Considering the fact that earnings are depressed thanks to the recession, this may represent good value.

While the company's sales dropped 16% in the quarter (year over year), half of this sales decline is due to the fact that the company's customers (retailers) are still reducing inventories. (To see why this occurs, and how this cannot continue indefinitely, see here.)

Despite the sales reduction, NWL has managed to hold gross margins steady. The company has done this by shutting down some of its least profitable product lines. The fact that the company manufactures / sells so many products through a number of brands offers some great downside protection: if any one or two product lines cannot compete or lose favor with customers, the company is still in great shape, unlike many of the "one-trick pony" companies out there. (For deeper discussion of this effect on a smaller scale, see here.)

The company has cut $100 million of its annual costs to cope with this recession (compare this with its operating income of $150 million for all of 2008), and has already identified further cuts that will be made if the recession continues to deepen. At this level, NWL may still offer compelling long-term value.

Disclosure: Author has a long position in NWL.

Comments

[Baby Bear:]

This article fails to address the issue of the company's debt position. The debt is the sole issue as to why the valuation of this company has reached the level it has.
Is the expected cash flow able to service the debt? Will contracting operations allow debt requirements to be met?
If the servicing of debt is a non-issue, then the conclusion of the article seems accurate.
Please address main concerns if writing are to be considered.

May 14 12:48 PM

[Saj Karsan:]

With their recent refinancing and the fact that they expect to generate $400 million in cash after interest, the debt appears well covered. But you are right, it deserved a mention.

May 15 01:05 AM