Will Newell Brands Stock Recover?

Home goods company Newell Brands (NASDAQ:NWL) has been on a bumpy ride in 2023. While the S&P 500 has gained over 18 percent YTD, Newell Brands has lost over 25 percent. Why has Newell dropped so much, and can the company mount a recovery after its drastic selloff? 

Will Newell Brands Stock Recover?

Newell Brands is the parent company of several well-known home goods brands. These include Rubbermaid, Coleman, Mr. Coffee, Oster and Yankee Candle. The company also owns a portfolio of office supply brands that includes Elmer’s Glue, Sharpie and X-Acto.

The company has struggled over the past year. In Q1, it reported net sales of $1.8 billion. This was down nearly 25 percent compared to the same period in 2022.

While it generated $0.54 per share in earnings a year ago, it lost $0.25 per share this year. Net margin fell to -2 percent, despite previously hitting 9.1 percent.

Even more concerning is the fact that Newell does not seem to have any immediate prospects for returning to profitability. Over the next 3 years, analysts expect the company’s earnings to contract at an annualized rate of over 7 percent. This negative growth could send share prices gradually lower.

Newell Brands is, however, deploying a new restructuring plan that management hopes can revitalize the company.

Appropriately named Project Phoenix, the plan involves reducing redundancies across Newell’s various business lines to increase synergistic growth and reduce costs.

The plan is estimated to save as much as $250 million while reducing headcount by 13 percent. If successful, it could help the company significantly improve earnings.

One downside of the new strategy for income investors, however, is a drastic reduction in the company’s dividend. In order to allocate capital to growth initiatives, Newell announced in May that it would reduce its quarterly dividend to just $0.07 per share.

Previously, the quarterly payout had been $0.23. While this new level is much more sustainable and may open up room for higher growth through reinvestment, the move makes Newell less appealing to income-focused investors.

Analysts Remain Optimistic 

The median analyst price target for Newell Brands is $12, indicating a 23.1 percent upside from the most recent price of $9.75. Encouragingly, the lowest price target for the stock is $9, suggesting that even bearish analysts do not see enormous downside over the coming year.

Newell’s valuation is mixed, but the company is likely trading at a more or less fair price in light of its current difficulties. At 0.45 times sales and 10 times forward earnings, Newell Brands shows many signs that would normally suggest undervaluation.

Given the fact that earnings will likely continue to sink deeper into negative territory in the coming years, however, these low multiples appear justified.

Future Returns In Jeopardy

Declining fundamentals and seeming loss of competitive position threaten future shareholder returns. Despite a portfolio of universally recognized consumer brands, Newell has seen its sales and earnings shrink.

While much of this is likely due to the pressure put on consumers by inflation, the company has not been able to respond effectively.

Speaking of inflation, prolonged macroeconomic headwinds could continue to slam Newell Brands and keep its share prices depressed. With core inflation still at nearly 5 percent, Newell and other consumer-oriented brands could still face difficulties for the rest of 2023.

Investors buying on expectations of higher growth from Project Phoenix also run the risk that the restructuring will deliver less than expected. While Newell seems like a business that could stand to benefit from basic improvements in operational efficiency, there’s no guarantee that Project Phoenix will return Newell Brands to profitability.

Finally, Newell Brands carries a debt load of about 1.4 times its total equity. Although still relatively manageable, the company’s interest expenses are gradually climbing.

Over the past year, quarterly interest expenses rose from $59 million to $68 million. If this trend continues, debt service could gradually eat up more and more of Newell’s cash.

Is Newell Brands Due for a Recovery?

Despite its current struggles, Newell still has an impressive portfolio of leading home goods brands. The value of these brands, especially once consumer spending begins to rebound, is difficult to ignore. In the long-term, it seems likely that Newell Brands will eventually mount a recovery.

The problem for investors, however, is the opportunity cost of waiting for this potential recovery. With negative earnings growth expected to continue for multiple years, it’s difficult to see share prices rising significantly above their current levels without a major earnings surprise.

Considering some analysts think a new bull market for the S&P 500 is forming, investors risk missing out on gains elsewhere while waiting for Newell Brands to catch up to the broader market.

Ultimately, Newell Brands may be a good candidate to sell at this time. A stellar brand portfolio notwithstanding, Newell’s falling sales, negative earnings and debt load all make the stock riskier than its potential upside seems to justify.

While the previously high dividend may have made it beneficial to hold Newell, the lower distribution removes this advantage. Even though the company is likely to recover in the long run, investors will likely do better by deploying their cash elsewhere in today’s market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.