Last Friday was horrible for the shareholders of Newell Rubbermaid (NYSE:NWL). The shares plunged nearly 12% on news that the company cut its 2011 outlook. It was the worst performance since the 2008 financial crisis.
Instead of earning $1.67 per share, the new guidance is for $1.60 per share. The Street was expecting $1.69.
Yet, Newell Rubbermaid is a great company – and is still making money, right? So maybe investors have overreacted and there may be an opportunity? Well, let’s take a look at the pros and cons:
Pros of NWL Stock
Great platform. Newell Rubbermaid has a strong line of products for businesses and consumers. A major part of the strategy has been to purchase companies. Some of the brands include Graco, Waterman, Lenox, Paper Mate and Sharpie.
New products. The company’s motto is to focus on “brands that matter.” A key to this has been investing in product development and innovation. At the same time, the company has been exiting its commoditized businesses (known as “Project Acceleration”). Over the past year, Newell Rubbermaid has introduced some excellent products. Examples include the Microfiber Spray Mop, which improves floor cleaning; the Sharpie Liquid Pencil, which is a smooth pen that erases like a pencil; and Goody’s Simple Styles, which provides a salon-quality hair styling at home.
Efficiencies. Newell Rubbermaid has also made great strides in reducing its costs. Part of this has been through improved supply-chain operations, such as with purchasing, distribution, transportation and sourcing. The company has also been reducing its manufacturing footprint.
Cons of Newell Rubbermaid
Economy. As seen with the bad jobs report last week, the US economy appears to be slowing down. Unfortunately, Newell Rubbermaid gets about three-quarters of its revenues from North America. So it will feel the pinch in turn as consumers cut back. Moreover, the company’s items are relatively discretionary, which should put even more pressure on the top-line.
Commodities.
Even with its cost-cutting, the rise in materials costs is having an impact on margins for Newell Rubbermaid. In light of the soft demand environment, it will be extremely tough to raise prices to compensate for the costs.
Distribution. Retailers have much influence when it comes to negotiating contracts. This is especially the case with discounters like Wal-Mart (NYSE:WMT). They expect to get strong deals, which means squeezing Rubbermaid’s bottom line.
Verdict
Newell Rubbermaid is a solid operation and management has been aggressive in making changes. It has a focus on innovation and premium items. Of course, cost-cutting is also important.
But the slowing economy is likely to take a toll. So even though the stock price is fairly cheap – at about 14 times earnings – there are no catalysts to get things moving, at least in the short-run. In light of this, the cons outweigh the pros.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
