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Newell-Rubbermaid: Cheap Stock on Conservative Assumptions

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Late 2012 will mark the start of the company's "strategic phase," with 5% to 8% growth on core sales growth of 3% to 4% followed by an "acceleration phase" expected to begin in two to three years.

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Newell Rubbermaid (NWL) has looked to most analysts like a sort of mindless old-style conglomerate for some time. The days of a zillion small household products and industrial manufacturing businesses that had low-cost Chinese manufacturers snapping at their heels are hopefully over. Moreover, there has been a wholesale turnover in the businesses the company participates in during the past half decade.

Going forward its businesses are somewhat more logical, with about two-thirds of earnings coming from a diverse set of businesses that can be called household products and one-third from industrial consumables. Additionally, its present businesses have returns that seem to be more defensible with some growth opportunities in developing markets.

Because of the large number of businesses and the lack good market share reporting for most, the sell- and buy-side analysts do not have good visibility into market-share trends and other data for the largest players and the rest of the industries as well.

Newell's operating profit is split fairly evenly among its three areas.

Home and Family has several businesses. One is strollers/car seats with a strong mainline brand in Graco and two upscale brands in Aprica and Teutonia. With Graco having good presence in Target (TGT) and poor presence in Wal-Mart (WMT), its unit growth, ex market share gains, is suspect. I also question the ability to grow two upscale stroller brands too, at least in the US.

Window hardware and draperies is another no- or slow-growth area, with Levalor aimed at the mass market and Kirsch at the specialty sector. I could not find any Levalor in Wal-Mart or Target, which were both overwhelmingly private label. I assume it is in JC Penney (JCP) and better stores, meaning that its growth is very constrained. Management is not interested in growing it in new geographies.

The same can be said for Calphalon in cookware, which is sold in predominately upscale retailers, as every Food Network personality seems to have their name plastered to a new Chinese-made, mass-retailer line. Goody, a strong upscale electric hairdryer maker, only had one offering in Target, and it was the best Target offering and was selling well. It is one of the smaller participants in that segment of the mass market.

Then there is Rubbermaid in food and storage containers. Rubbermaid's pre-Newell history of pricing too high and losing a huge amount of its business to Sterilite is still obvious in Wal-Mart and Target. The brand seems to be stable now with what is left, mostly food storage containers. Rubbermaid also has a health products division, which is slated for overseas expansion.

Office Products Division has writing instruments anchored by Paper Mate, Uni-ball, and Sharpie. Sharpie seems to stand out with good distribution and little competition at all retailers. Parker Pen and Waterman in upscale writing instruments will probably not be big enough to need analyzation. Dymo label printers fit well with the writing instruments for heft with retailers. Mimio is a line of electronic in-classroom teaching aids that seem to have some promise.

Tools, Hardware and Commercial products include Irwin and Lenox, which specialize in hand and power tools and accessories. They also retail through Lowe's (LOW) and Home Depot (HD), though I seem to see a lot of private label in those areas too, and these companies are moving up their private-label percentages.

Overall improvement in the company's operations and deserved valuation is obvious from the company-wide macro numbers. From 2002 to 2011 136 plants shrunk to 40 and capacity utilization went from 63% to 80% (Both are comparable recessionary numbers.). Gross margin, at 29% in 2004, is now 38%. About half of manufacturing is outsourced, and production costs would seem likely to now be competitive.

One big swing factor is European operating margin, which was at 7% in 2010 and where management is targeting 10%.

Fourth quarter 2001 core sales were up 3.7%, heavily influenced by the Tools Hardware and Commercial products business, and earnings were better than expected with guidance for 2012 at the high end of analysts' range. But approximately 10% of revenue comes from Western Europe, and there, core sales were down. Emerging-markets revenue is up to a mid-teens percentage, doubling from 2003.

Newell will benefit this year from restructuring programs begun in past years and will have a lot of flexibility to makes its earnings.

Beyond this year and next, I see the company's sales growth benefitting in the developed world, or the US at least, by a slow cyclical rebound in the economy against a backdrop of little or no secular unit growth. Most all of the growth will come from the emerging markets. I do not know the competitive situations in these markets for Newell's products, but I strongly suspect that it will not be competing with many companies as big as itself, given its US competitive set. It seems reasonable that its US and European operations will hold market share ex any private label inroads, and I do not see its margins being high enough now to offer the opportunities that branded consumer-packaged-goods companies present to retailers for private label increases.

The company is in the middle of the "delivery phase" of its game plan right now, which calls for EPS growth of 3-6%. Late 2012 is to be the start of the "strategic phase," with 5-8% growth on core sales growth of 3-4%. The "acceleration phase" is expected to begin in two to three years with 4%+ sales growth and 6-9% EPS growth.

Before the acceleration phase the company will benefit from share buybacks and increasing dividend payouts, as well as some cyclical economic growth, assuming that continuing efforts for European margin growth -- the last big hurdle for its operations -- are not too hurt by continental debt woes. The 4%+ unit growth for that period will be largely based on Newell's efforts in Mexico, China, and Brazil -- its targeted nations. But to do that with flat unit growth in developed nations (now 85% of sales) requires about 20% growth in these emerging markets in that period, though it is a plus that the emerging markets businesses are generally the best margined in the company.

I think that a 3%, or at most a 4% long-term EPS growth rate is the most I want to ascribe to Newell for now, realizing that the growth rate may become easier to estimate in the future.

The correct risk discount for Newell Rubbermaid is not that of the other household products stocks. The others sell staple products that deserve a 4% risk discount. Newell's products are more in the vein of semi-durables and small-ticket durables, though its does have some relatively strong market shares in its businesses now.

On the industrial side the businesses sell goods that generally have sales that vary with capacity utilization and could be considered industrial consumables. While setting required risk discounts is art and science, I will take Newell's 5% or 5.5% first conclusion up to 6%, based on the company still having a somewhat conglomerate-like business mix, as well as the relative lack of clarity into the fundamentals in all those businesses that are present here.

The present $17 price and consensus $1.65 and $1.82 EPS for this year and next imply no growth to infinity (with a 4% risk-free rate). A reasonable 3% five-year growth rate says the stock should be $21.50 and a 4% growth rate implies $23. Beyond that, if management's numbers can ever be achieved, the stock is a home run. That having been said, my experience tells me that it may take time for investors to get on board. Then again, my experience and valuation models also scream that most other consumer-related cyclical stocks have gotten to high valuations relative to the economic backdrop.
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