After recommending Newell Rubbermaid
(NYSE: NWL) as a buy in April 2012
when the stock was priced at $17, the stock is up around 50% and is now efficiently valued.
The stock price at $26 -- using consensus EPS estimates of $1.82 and $2.00 for 2013 and 2014, respectively, and a 6% risk premium -- discounts a 5% five-year EPS compound growth rate.
When I recommended buying Newell Rubbermaid last year, I felt that the stock would get to $23 based on a 4% growth rate. I also said that investors would have to reassess whether management’s “acceleration phase” of EPS growth due in 2014 or 2015 would be achievable. That phase, according to management, would have 4%+ revenue growth and 6-9% EPS growth. Seven percent growth implies a $27.50 price, and 9% growth results in $30, or an 18% increase.
Fourth-quarter 2012 results did not point to that acceleration phase coming soon. Organic sales rose 2.2%. Gross profit margin, at 36.7%, was down .5%. Pricing and trade spending hurt gross margin dollars. SG&A to sales ratio fell .4% to 25.0%. Expense saving will help EPS comparisons a lot during the next two years, and I would not look for any big EPS disappointments. But any stock valuation increase will only come based on an expectation of a higher sales growth rate accompanied by at least a stable gross margin.
Organic sales growth guidance is 2-4% for 2013. It would seem that over 4% sales growth would be a 2014 occurrence, if it happens. Looking at the fourth quarter: Baby and Parenting’s sales were up 6% on some Graco share gains in the US and Aprica (high end stroller) sales in Japan. If Graco got distribution at Wal-Mart
(NYSE:WMT), where I have not seen its products, that could be an accelerator of sales growth, but given Graco’s price points, I see no reason that should happen. Home solutions sales were up .5% and I wonder where sales comparisons may end up with continued strain at JC Penney
(NYSE:JCP). Specialty sales declined 1.3%. Tools sales increased 6% on strength in Latin America, which will have to continue to get sales growth to the 4%+ for the entire company. Writing grew only 2.4%. Commercial Products were up 1.3%.
So, as I look at the totality of Newell’s businesses, I see them as fairly hostage to the worldwide economic outlook, much as is the stock market at this point. Any second half decrease in growth from Europe’s deepening recession or deflationary effect of increased taxes or spending in the US will push out Newell’s ability to show investors that a higher sales growth rate is achievable.
At $17, Newell stock had the ability to swim upstream versus the market... but at $25, that has been lost.
No positions in stocks mentioned.
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