Description

NWL is a fallen angel in the mundane business of selling household products to mass merchants. In 1999 it had a significant stumble; earnings went from 1.94 per share to 1.65 per share. The prime reason for its stumble was its acquisition of Rubbermaid.

Over the past several years NWL had a good basic business operation, and it added to its performance by acquiring small to mid sized household product companies and significantly increasing earnings. The Rubbermaid acquisition was much larger than anything it had ever acquired before. As a result, NWL and the street underestimated how soon earnings could be increased. They missed the mark. This acquisition was about 5 times as large as anything they had ever done before. It will take some time to get operations at this larger entity to what they have been historically.

However, the underlying operating and cost cutting talent is there. From 1988 to 1998 earnings grew from 0.51 per share to 1.95. During the same time the stock price went from a split adjusted 10 to over 50 per share.

Over the next year margins should fall back in line and sales should increase. This should take earnings per quarter from .27 in the first quarter of 1999 to .65 per quarter late in 2001. The company going forward should be able to have a return on total capital of 14% and an ROE of around 20% with a debt to worth ratio of only 1:1.

Given its ability to increase sales and substantially increase earnings it should not have much trouble generating earnings of 4.00 per share by 2005. If we give it a PE of 20, which would not be unusual for this company or the sector, that would mean in 2005 it should trade at around 80 compared to 25 recently.

Catalyst

The catalyst for change will be a full integration of the Rubbermaid entity and a return to former margin levels