“Newell Rubbermaid, Inc. (NWL 15.04 NYSE) makes plastic storage bins, tools, window blinds, pens and a number of other household items. Its top brands include Rubbermaid, Sharpie, Paper Mate, Waterman and Levolor. The company has three divisions: Home & Family, which supplied 43% of its 2009 sales and 36% of its earnings; Office Products (30%, 31%) and Tools, Hardware and Commercial Products (27%, 33%).
“Newell’s sales rose 13.2%, from $5.7 billion in 2006 to $6.5 billion in 2008, largely because it bought a number of other firms in this period. However, 2009 sales fell 13.8%, to $5.8 billion. That’s because retailers ordered fewer products during the recession. As well, Newell discontinued low-margin items; that accounted for about five percentage points of the drop.
“Thanks to earlier cost cutting, Newell’s earnings rose 17.9%, from $409.1 million in 2005 to $482.3 million in 2007. Earnings per share rose 16.2%, from $1.48 in 2005 to $1.72 in 2007, on more shares outstanding. The company lost $49.8 million, or $0.18 a share, in 2008. However, earnings rebounded to $285.5 million, or $1.02 a share, in 2009. Without unusual items, such as restructuring costs, Newell would have earned $1.31 a share in 2009, up 8.3% from $1.21 in 2008.
Cost cuts bring big savings
“Newell’s current restructuring plan will save it $200 million a year, starting in 2011. So far, it has realized $180 million of these savings. Separately, the company recently began restructuring its European operations. This involves job cuts and centralizing some of its operations. Newell expects to pay $90 million to $100 million in severance and other costs. This includes $15 million in 2010. However, this plan should result in annual savings of $50 million to $60 million by the end of 2012, when Newell expects to complete this restructuring.
“The company is also taking steps to lower its future interest costs. In August 2010, it sold $550 million of new 4.7% notes due in 2020. It will use this cash to buy back $500 million of its shares. As well, Newell plans to issue new shares and use its existing cash holdings of $259.8 million to buy back other debt, including $345 million of 5.5% convertible notes due in 2014, and $300 million of 10.6% notes due in 2019.
“After it completes these moves, Newell will have increased its outstanding shares by 8 million. As well, it expects the refinancing to cut its 2010 earnings by $200 million. However, the extra shares will only raise the total outstanding by 3%. And the company will have refinanced $600 million of debt at lower
interest rates. To put that in context, the company’s long-term debt was $2.05 billion, or 49% of its market cap, on June 30, 2010.
New products set the stage for gains
“The company’s cost-cutting and refinancing plans also free up cash for investments in new products. Despite the big drop in 2009 sales, Newell’s research costs fell just 0.9%, to $118.4 million (or 2.1% of sales). It spent $119.5 million (or 1.8% of sales) on research in 2008. This spending has helped the company launch several innovative new products. For example, it recently started selling a mechanical pencil that uses ink-like liquid graphite instead of fragile pencil leads. Newell has also developed a new line of insulated window blinds that help lower its customers’ heating bills.
“Newell Rubbermaid spends almost as much on advertising its products as it does on developing them. In 2009, it spent $112.6 million (or 2.0% of sales) on ads, compared to $143.2 million (or 2.2% of sales) in 2008. The company will probably spend more on advertising over the next few years as the economy recovers. That will also help it increase sales in international markets, which now account for just 25% of its overall sales.
Low p/e adds further appeal
“The stock fell from its pre-recession peak of $32 in 2007 to just $4.51 in March 2009. Despite its recent recovery to $15, Newell now trades at just 10.0 times its likely 2010 earnings of $1.50 a share. That’s a low p/e ratio in light of Newell’s well-known brands and rising profitability. The company’s broad product base also limits its reliance on any single customer. Moreover, demand for many of Newell’s products tends to remain steady during economic downturns. The $0.20 dividend yields 1.3%. Newell Rubbermaid is a buy.”
Patrick McKeough, Wall Street Stock Forecaster
