NWL is a household products company that has several brands such as Yankee Candle, Rubbermaid, Sharpie, Expo, Elmer's Glue, Graco, Papermate, and Coleman; to name a few. Several other brands are also owned by the company. Moreover, the business has recently turned into a great opportunity for investors.
After eliminating most of the upper management in the company, a new CFO and CEO has come to the throne. CFO Chris Peterson has history at Proctor and Gamble and the CEO Ravi Saligram is leaving Ritchie Bros. in October to be seated at the helm of NWL. Since Saligram's arrival at Ritchie Bros., he has transformed the company into an internet phenomenon in the auctioneer space for heavy equipment. After joining Ritchie Bros. in July of 2014, the company's stock price has risen roughly 96% to-date. I believe that with upper management and the activist investors from Icahn Enterprises, the company will be under control.
As for reductions in overhead, the company has aspirations to cut SKU's by 50% by the end of 2020, reduce overhead costs from 21% of sales to 15-16% of sales by the end of 2020, and IT business applications by 85%. Normalized operating margins have improved to 11.3% and normalized gross margins have increased to 35%. At the end of 2019 Q2, the company delivered EPS of $.45 compared to $.29 the year before. The year-over-year increase was +45% and the earnings surprise was roughly +25% compared to analyst forecasts. Also, the company generated roughly $191 million in operating cash flow compared to $180 million, year-over-year. Year-to-date, operating cash flow is $390 million better than a year ago. As a result, I believe that the company is significantly undervalued.
Overall, with all of the characteristics mentioned, my analysis has concluded that the value of the business on a per-share basis is $28.76. The numbers used in my analysis reflects the implied equity risk premium, beta of the average household products company in the terminal year, and historical growth rates when the business was healthy. Finally, the value obtained is derived from the distress valuation model presented by Aswath Damodaran and the value is adjusted to the probability of distress representing their Moody's stable investment rating.
The main risk of this investment consists of the company being unable to raise their operating margins while decreasing leverage and overhead costs. Also, another risk associated with this investment is that the core sales of each segment of the business decreases along with the operating margins.
Judging by the valuation model that I have presented, there is a significant margin of safety for any investor who is willing to allocate capital into a higher risk opportunity. I believe that this company has the potential to cut their overhead, increase their operating margins, and simultaneously revamp their e-commerce channel to use their inventory in a more cost-effective way. Currently, their expectations are that the working capital changes of reducing stocked inventory and speeding up their cash conversion cycle will reverberate to a more efficient company. Likewise, I believe that with their changes to management, decisions to cut debt and continue repurchasing shares, and the impactful changes to working capital and overhead costs will deliver fruitful results to investors. At the end of the day, the future will tell us how these assumptions play out. Thank you for reading and please follow-up with any insightful comments!
The valuation was based on of the 10-K from March 4, 2019 and the updated operating results in the investment thesis are consistent with the 10-Q from the 2nd quarter of 2019.
Disclosure: I am/we are long NWL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.