Description

Opportunity: Newell Brands (NWL) is a large worldwide manufacturer, marketer, and distributor of consumer and commercial products. The market gives NWL substantially lower multiples relative to peers because of past management (mgmt.) failures and accounting shenanigans. However, the new CEO has a strong track record, bought stock in the open market, and cleaned house, which resulted in growth returning during this past Friday’s (10/30/20) earnings release and is expected to continue through 2022 and beyond. The opportunity was so appealing that Starboard and Icahn fought for de factor control over the company starting at $25+/share. Every time the stock would gap down, Icahn would buy more, eventually retaining ~10% ownership with the bulk of his position bought at ~$25. Having a steadily, profitable history since 1903 with some acquired brands history even tracing back to the mid-1800’s, NWL could double, triple, or more. In presentations, Starboard gave the company a price target of $48+/share if the turnaround would happen (described as divesting assets to slim down to ~$9B in revenues – FY17 had $14.7B in revenues – see estimates below). NWL has been dead money for ~2 years, but the turnaround is occurring as planned. Once the overhang clears and the investor disgust dissipates, mostly likely from continued revenue growth and margin expansion, the multiple will re-rate. Please note my original purchase price and pitching prices were at the $16-$17 range. Given three VIC short pitches (2015, 2016, and 2017) previously (which have worked out well), this idea seems to remain under the radar. 

The New CEO’s Impressive Track Record and Stock Purchases: Starting in October, 2019, Ravi Saligram became the new CEO and was most likely handpicked by Carl Icahn (his ownership levels and board representation) due to his turnaround and CEO skills, “roots in CPG,” and digital transformation experiences. Saligram bought ~$500K shares in the open market and has a strong track record. Prior to NWL, he joined Ritchie Bros. Auctioneers (RBA) knowing “nothing” about the business and “to be very frank, never heard of Ritchie” (Saligram), yet he was able to transform a six-decade old firm into a relationship-based, tech and data driven company. RBA was supposed to be his “last hurrah” after his famous debut at OfficeMax. Over 5 years, RBA stock returns were 78% and 121% on the NYSE and TSX respectively. As CEO of OfficeMax, he turned the business around, merged it with Office Depot (ODP) and unlocked >$500M in synergies, which resulted in a doubling of the combined stock within the following 12 months. Before that, he was at Aramark (ARMK) as President of International and Chief Globalization Officer, where he turned the international business into a growth engine: doubling international revenue and quadrupling managed cash flows over an assumed 7 years.

Business Quality: NWL has very well known brands with large market shares. Positioned #1 or 2 in each category, these moats have recovered and are now gaining share. Large market shares should lead to pricing power. NWL has relatively minimal economic sensitivity compared to most companies in regular recessions and in a COVID-related recession. As a result, NWL reliably produces FCF, even in 2008. When NWL acquired Jarden in 2016 for ~$15B (versus current EV of ~$13B-$14B), it was suppose to dominate store shelves and move quickly into online sales. The latter is now happening (mentioned below), and the former is still in progress. Additionally:

·       Omni-Channel: NWL’s conversion to omni-channel could be a future advantage and Saligram has the skills to make this change. This can be seen from AMZN’s aggressive move into retail since 2019, “planning to open as many as 3,000 stores across the country by 2021.” AMZN reached out to TGT, WMT, HD, etc. (all 3 are in NWL’s top 10 customers) to collaborate on cashierless stores. BOPIS may be the next movement after COVID as AMZN and other ecommerce companies try to build and buy physical locations.

·       Portfolio Composition and Ecommerce: All of NWL’s top 10 customers are either online-focused or traditional brick-and-mortar that have adapted, growing their online sales by high double digits and some even triple digits. For instance, WMT accounted for 14.6% of 2019 sales and it said last quarter its U.S. ecommerce business grew 79%. NWL turned away from losing retailers to winning retailers with its top 25 brands accounting for ~85% of sales. For example, NWL's Yankee Candle's direct-to-consumer (DTC) segment made up half of the decline of the retail business in 2Q20. Additionally, CEO Saligram made all new management hires except for an ecommerce head, which he hopes to make soon. For comparisons, TGT really began to focus on digital and BOPIS (buy online, pick-up in store) innovation in Aug 2017, and its shares increased ~75% from then to pre-COVID/March 2020 and ~200+% if you include up to 11/30/20.

o   For .com, AMZN is first but WMT is second. AMZN is the everything store while WMT is the everywhere store. NWL just hired an omni channel general manager focused on NWL’s relationship with WMT, as WMT fuses online and physical, which is a big opportunity for them. This GM starts in 2 weeks. The CEO emphasized this.

·       Culture and Innovation: After 3Q20 earnings, the CEO said, "let’s bring NWL back to its 1994 days, when Rubbermaid was #1 on Fortune's most admired list. It’s in our DNA and I am just trying to bring that out…the last few years when NWL acquired Jarden, there was a lot of internal focus, now we are trying to get the external focus: focused on the consumer.” For the new management team, Saligram said he “interviewed for a consumer first culture mindset.” He then mentions launching new innovations online and overall faster turn around times. He said: “Innovation is going to become an engine…the spirit of innovation is back at NWL.” He also said, “NWL is not just riding the wave, but gaining share in categories, such as food.”

·       Staying Power: IR and the CEO said NWL's brands have longevity (staying power) and are iconic brands.

·       Capex Light Business: 2019’s capex represents ~2.7% of total revenues.

COVID Overshadows Early Turnaround Signs: After Saligram’s start, NWL began turning around. Mgmt. estimates COVID as a 13-point headwind to 2Q20’s core sales, which declined 12.6% with FX unfavorable by ~2-points. Hence, core sales started to grow again.

Turnaround Executes Through COVID: In 3Q20, NWL saw revenue growth return to the company with a 5.1% y/y increase (core sales +7.2%) after declines since 2017. Saligram was “animated” during the call and said NWL is turning the corner on the turnaround, so they reinstated guidance with flat to LSD revenue growth next quarter and expects LSD revenue growth in 2021, 2022 and beyond, even though they are not guiding those years yet. NWL reinstated FY20E FCF and EPS guidance higher than the FY outlook they gave in 4Q19. He reiterated that the long-term model also calls for 50bps of annual operating margin expansion and FCF productivity >100%. Later that day, Saligram went on CNBC and then Yahoo the next business day. The digital transformation has legs: online revenues were ~21% of total revenues, “almost double YTD 2018 levels” (Saligram), which grew ~40% q/q and YTD.

More Earnings History and Consensus Estimates:

Year                  FY18                                           FY19                FY20E              FY21E              FY22E

Revenues          $10.154B                                     $9.715B             $9.286B             $9.558B             $9.752B

EPS                  $2.49                                           $1.70                 $1.68                 $1.71                 $1.87

FCF                  $1.331B                                      $3.544B             $1.636B             $1.370B             $1.630B

Share price       tumbles from ~$50’s to $20’s      cleaning house in $10’s-$20’s with new mgmt

Valuation and Estimates are Conservative: Estimates are underappreciating the opportunity so using them provides conservatism. Applying ~20x EPS or ~15x FCF to FY22E results in a ~$35-45/share target price. They are conservative as 1) 3Q20’s TTM EBITDA was reported as $1.30B yet consensus has $1.24B for FY20E even though 4Q20E is guided to be much better than 4Q19, 2) NWL reinstated FY20E OCF and EPS guidance higher than they did in 4Q19 by $75M and $0.18, and 3) based on the prior two points, consensus is likely undervaluing the continued cost savings and margin expansion. Also, some peers are trading at substantially higher multiples, so if the turnaround continues to execute, the multiple could be higher on larger numbers (i.e. 25x on >$2.75 EPS is >$69 stock, or >214%, more than a triple). 

Catalyst

Continued quarterly execution, relative value, mgmt continues to clean house and roadshow the new story, Icahn and his team stay on top of new mgmt, and the sell side catches up to the turnaround as they did after I posted on COTY.