We recently upgraded our recommendation on Newell Rubbermaid Inc. (NWL), a global manufacturer and marketer of consumer and commercial products, to Neutral with a price target of $19.00. Previously, we had an Underperform rating on the stock.
Newell is one of the leading manufacturers of home and office products. The company has several established brands, which includes Sharpie, Paper Mate, Dymo, Waterman, Parker, Irwin, Lenox, Rubbermaid, Levolor, Graco, Calphalon and Goody.
We believe that the stock is bound to surge as the economy gradually revives. This was quite evident in Newell’s second-quarter 2010 results. The quarter witnessed growth in core sales, gross margin expansion, improved productivity, gain in market share on the heels of new product introduction, and increase in the bottom-line. The quarterly earnings of 51 cents a share surpassed the Zacks Consensus Estimate of 44 cents and climbed 8.5% from 47 cents earned in the prior-year quarter. Core sales rose 1.5%.
Buoyed by the strong quarterly performance, Newell lifted its fiscal 2010 adjusted earnings to a range between $1.40 and $1.50 per share from the earlier prediction of $1.38 to $1.48 per share. The company also now expects core sales growth in the mid-single digits compared with low to mid-single digits previously anticipated.
In order to revamp its operating activities, Newell has also undertaken initiatives such as ‘Project Accelerate,’ which is expected to be fully implemented in 2010, with an aim to realize annualized savings in excess of $200 million, and ‘European Transformation Plan,’ which is expected to be completed in 2012 and is focused on realizing annual savings of $50 to $60 million.
Newell has been also actively managing its capital, generating healthy cash flows. During second-quarter 2010, the company generated operating cash flows of $154 million. Management expects to generate operating cash flows of more than $500 million for the full year.
However, intense competition from other established manufacturers and debt laden balance sheet still remain matters of concern. Newell ended second-quarter 2010 with a total long-term debt of $2,442.3 million, representing a debt-to-capitalization ratio of 56.3%. This is substantially high, and could adversely affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.
Given the pros and cons, we prefer to be Neutral at this juncture. Moreover, Newell holds a Zacks #3 Rank, which translates into a short-term Hold recommendation, and correlates with our long-term view.