Newell Brands Inc. (NWL), a manufacturer, designer, and marketer of consumer and commercial products, has gained 15% over the past month on sales growth in some of its categories, such as its Food, Commercial Appliances & Cookware, and Outdoor & Recreation categories. However, given the company’s rising operating expenses, and stretched valuation, we expect the stock to retreat in the near term. Pandemic-induced lockdowns had a heavy, negative impact on NWL’s supply chain and consumer goods distribution, leading to weak revenue and earnings growth.
While the company’s stronger-than-anticipated sales growth has helped the stock gain 32.3% over the past year, its future looks uncertain based on several factors.
Here is what we think could influence the stock’s performance in the near term:
Uncertain Growth Prospects
The COVID-19 pandemic and resulting lockdown measures changed consumer spending and demand worldwide markedly. With the rapid shift of businesses online, the demand for products such as writing instruments and papers has fallen precipitously. .
Although NWL has witnessed steady demand for some of its categories, such as air purifiers, food and home fragrance units, and other commercial solutions, the company’s learning and development segment has suffered badly. The segment’s sales have declined 11.7% year-over-year to $728 million, reflecting the impact of school and office closures.
Weak Financials
In the third quarter ended September 30, 2020, NWL’s net sales were $2.7 billion, representing an increase of only 5.1% versus the prior year period. Its normalized operating margin was 14.9% compared with 12.7% in the prior year period. However, NWL generated a net loss of $897 million for the nine months ended September 30, 2020, while its gross profit declined 4.7%. Moreover, NWL generated an operating loss of $882 million. Its other expenses increased 28.6% year-over-year to $9 million over this period.
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Lower Profitability
NWL’s trailing-12-month gross profit margin of 32.87% is lower than the industry average 33.6%. Also, the company’s negative ROE and ROA contrast with positive industry averages.
Stretched Valuation
In terms of forward PEG, NWL is currently trading at 4.20x, which is 128.6% higher than the industry average 1.84x. We believe this premium is unjustified given that other players in the consumer and commercial goods industry are trading at relatively lower multiples despite having better financials.
Consensus Price Target Indicates Potential Downside
Currently trading at $26.53, analysts expect NWL to decline to $23.1 soon, representing a potential 12.9% downside. Of 10 Wall Street analysts that covered the stock, only three rated it a Strong Buy.
POWR Ratings Indicate Uncertain Prospects
NWL has an overall rating of C, which equates to Neutral in our POWR Ratings system.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, NWL has a Growth Grade of C. This is consistent with its weaker-than-industry earnings growth potential. The company’s ESP is expected to grow at a CAGR of 3.7% compared to the industry average of 12%.
In addition, NWL has a C grade or Value and Momentum, reflecting the stock’s relative overvaluation and weak price performance.
Of the 64 stocks in the industry, it is ranked #46.
Click here to access NWL’s ratings for Momentum, Stability, Sentiment and Quality.
Better than NWL: Click Here to learn about top rated Home Improvement & Goods stocks.
Bottom Line
Although NWL is progressing, with core sales growth in a few categories, soft demand and macroeconomic headwinds may heavily influence its growth potential. This, along with its premium valuation, lower profitability, and weak revenue growth, could lead to a price decline for the stock in the near term. However, we believe the company’s meaningful innovations to leverage consumer trends could help it increase its market share in the long run.
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NWL shares were trading at $25.95 per share on Thursday afternoon, down $0.28 (-1.07%). Year-to-date, NWL has gained 22.23%, versus a 4.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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