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Newell (NWL) Tops Q1 Earnings, Stock Jumps on Raised View

Newell Brands Inc.NWL came out with first-quarter 2017 results, wherein both the top and the bottom line surpassed estimates. Notably, Newell hasn't missed earnings estimates for almost seven years now. Further, the company announced a dividend hike and raised its normalized earnings guidance for 2017, reflecting confidence in its future prospects.

Shares of the company gained around 10% in the pre-market trading session following the robust results and outlook. Thus, we believe that this splendid performance should provide some cushion to Newell's stock, which underperformed the Zacks categorized Consumer Products - Miscellaneous Staples industry in the last six months. Evidently, Newell's shares declined 6.1% in the last six months, compared with the industry's gain of 7.2%.

Newell's normalized earnings of 34 cents a share in the first quarter came ahead of the Zacks Consensus Estimate of 29 cents, though it declined 15% year over year.

On a reported basis, including one-time items, the company recorded earnings of $1.31 per share, compared with prior-year earnings of 15 cents. Earnings benefited from core sales growth, Project Renewal savings, cost synergies from Jarden (acquired in Apr 2016) and gain on sale of Newell's Tool businesses. This was largely countered by foreign currency headwinds, increased brand and e-commerce investments, greater interest costs and greater share count on account of Jarden's buyout.

Net sales advanced a substantial 148.4% to $3,266.3 million in the quarter, also surpassing the Zacks Consensus Estimate of $3,208 million. The stupendous increase in sales can mainly be attributed to considerable contribution from Jarden, along with solid core sales growth. However, this was partly offset by the sale of the company's Tools and Décor businesses.

Core sales jumped 2.5%, driven by solid performance by Baby and Appliances; Writing and Jostens; Waddington; Team Sports and Beverages; and Process Solutions. Further, the company witnessed core sales growth in all four regions. (The newly classified operating segments and regions are discussed in the following section).

Segmental Performance

In line with its Growth Game Plan and organization goals, management realigned its reporting structure (as of Mar 31, 2017), bringing its 15 reporting operating units under 5 segments: Live, Learn, Work, Play and Other. The divisions under the newly created segments will be classified as follows:

Live (Appliances & Cookware, Baby & Parenting, Food, Home Fragrance), Learn (Writing & Creative Expression, Jostens, Fine Writing), Work (Consumer & Commercial Solutions, Waddington, Safety & Security), Play (Outdoor & Recreation, Fishing, Team Sports) and Other (Home & Family, Process Solutions, Held for Sale). Further, management revealed that its latest reporting framework includes four regions - North America; Latin America; Europe, Middle East and Africa and Asia Pacific.

Live net sales soared 231.5% year over year to $1,067.8 million, while pro forma core sales increased 2.7%. Net sales in the Learn segment advanced 47.9% to $569 million, while pro forma core sales were up 7.6%. Work net sales surged 128.5% to $614 million, while pro forma core sales slipped 2.9%. Sales for the Play segment increased considerably from $61.1 million to $628 million, with pro forma core sales climbing 0.5%. Net sales for the Other segment rose 39.4% to $388 million, while pro forma core sales grew 12%.

Margins

Newell's normalized gross margin contracted 410 basis points (bps) to 34.5% as synergies and productivity gains were more than offset by adverse mix effects of the Jarden acquisition, along with currency headwinds and raw material cost inflation.

Normalized operating income soared roughly 102.3% to $348 million. Normalized operating income margin contacted 250 bps to 10.6%, as the company's Project Renewal savings and synergies, more than offset the unfavorable mix owing to Jarden, increased investments in brands and e-commerce development and currency woes.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $687.5 million, long-term debt of $10,332.1 million, and shareholders' equity of $12,029.8 million. In the first quarter, the company used $289.2 million as cash from operating activities.

Concurrently, management announced a 21% hike in its quarterly dividend to 23 cents per share, reflecting its commitment toward augmenting shareholders' value.

Other Developments

As part of its expansion efforts, Archer Daniels concluded the buyouts of Woodwick and Sistema Plastics during the quarter. Also, it divested its Tools; Rubbermaid consumer totes; fire starter and fire log and the Lehigh cordage businesses.

Outlook

Management remains extremely pleased with its solid start to the year, with the first quarter being marked by core sales growth across all regions and most segments. Further, the company remains impressed with its global growth and progress with e-commerce advancement. Additionally, cost synergies and efficient expense management helped the company to exceed its operating margin target. Management remains confident of sustaining this momentum in 2017, where it anticipates these synergies to continue driving margins, which will boost cash flows. This is also reflected from management's aforementioned dividend hike.

All said, this Zacks Rank #3 (Hold) raised its earnings outlook for 2017, while keeping the other forecasts intact.

Newell still expects net sales for 2017 in the range of $14.52-$14.72 billion, reflecting 9.5-11% growth from $13.26 billion reported in 2016. The net sales forecast is based on the timing of acquisition and divestitures, foreign currency effects and the estimated core sales growth.

The company continues to anticipate core sales growth in a range of 2.5-4%. The company expects the core sales growth rate to pick up as the year proceeds as the company's transformation pace slows down.

Given the solid first quarter, normalized earnings per share are now expected in the range of $3.00- $3.20, compared with $2.95−$3.15 guided earlier. The raised earnings view also reflects the timing of acquisitions and divestitures and currency impacts. The company reiterated the previously stated 2017 tax rate forecast of 26-27% to hold true for most of the year, excepting a one-time low tax rate anticipated in third-quarter 2017. Consequently, the company expects a full year tax rate of nearly 23%.

Stocks to Consider

Better-ranked stocks in the same industry include Ollie's Bargain Outlet Holdings Inc. OLLI , with a Zacks Rank #1 (Strong Buy), Energizer Holdings Inc. ENR and Blue Buffalo Pet Products Inc. BUFF , both with a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Ollie's Bargain has to its credit a spectacular earnings history and long-term EPS growth rate of 17.1%.

Energizer, with a long-term EPS growth rate of 9.8%, has delivered an average positive earnings surprise of 21.6% in the past four quarters.

Blue Buffalo, with a long-term EPS growth rate of 17.5%, has delivered an average positive surprise of 6.8% in the trailing four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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