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Carl Icahn Thinks Newell Brands Is A Screaming Bargain – Here’s Why

Carl Icahn Thinks Newell Brands Is A Screaming Bargain – Here’s Why

Newell Brands, Inc. (NWL) is an interesting stock in one of the highest-performing sectors of the U.S. economy. Over the past year, the Consumer Discretionary sector has shown an increase of almost 21% as measured by the Consumer Discretionary Sector SPDR (XLY). That performance applies even though the sector is down about 3% from the high point that it reached at the end of January. From the perspective of a value-oriented investor, the first thing about the company that makes a wide range of household goods from Rubbermaid food containers to Crock-Pot cookers to Sharpie markers that should pique interest is the fact that its stock is one of the biggest laggards in this space, having dropped more than 50% from its own all-time highs that were reached in June of last year.

Trend-based investors look at stocks in extended downward trends and generally reason that there has to be a good reason for it, and so they’ll avoid looking at the stock with any kind of bullish perspective until it shows significant signs those trends have begun to reverse. Value investors tend to take what most would call a “contrarian” approach, because they take the opposite view: the longer any trend lasts, bullish or bearish, the more likely it is to reverse in the opposite direction. That means that they tend to stay away from stocks in extended upward trends because they believe downside risk in those cases is increasing. It also means that they look at stocks in extended downward trends and can often find opportunities to start taking on new positions at bargain prices.

Billionaire Carl Icahn has been a successful value-oriented investor for decades, with a reputation as a “takeover titan” and “activist investor” who has shown repeated success in uncovering value in depressed companies throughout his career. His expertise and level of proven success puts him among the rarefied elite of value investors like Warren Buffett. Over the last couple of weeks Mr. Icahn made news by increasing his holdings in NWL from around 5% of the company’s total outstanding shares (as estimated at the beginning of March) to 6.9% based on his latest SEC filings. In increasing his position, NWL has agreed to let Icahn appoint four people to the company’s board, giving him a significant and influential voice in the company’s business plan for the foreseeable future.

Is the stock really that undervalued? One of the concerns about stocks that are trading at extreme lows is that there are significant problems with the underlying business that justify the stock’s horrid price performance. In the case of NWL, the truth is the company is undergoing a transformation in its business and operations, but the picture is better than many seem to believe. There are a number of critical strengths in the stock’s fundamental profile, and I believe those, along with the stock’s steeply discounted price, are among the biggest reasons Mr. Icahn clearly sees an attractive long-term opportunity. Another interesting element is that another minority shareholder and activist investor, Starboard Value LP, had been lobbying for the same kind of leverage Mr. Icahn just beat them to; just yesterday they released a statement, saying that they still see NWL as being “substantially undervalued.”

I take this recent tug-of-war between NWL’s executive leadership and these two very motivated, activist investors as a sign that there is a lot of institutional interest in this company. For me, that translates as a strong indication of opportunity that a lot of average investor’s don’t pay attention to. Let’s take a look at a few of the company’s important measurables to see what makes NWL so attractive right now.

Fundamental Profile for NWL

Newell Brands Inc. (NWL) is a marketer of consumer and commercial products. The Company’s segments include Writing, Home Solutions, Commercial Products, Baby & Parenting, Branded Consumables, Consumer Solutions, Outdoor Solutions and Process Solutions. Its products are marketed under a portfolio of brands, including Paper Mate, Sharpie, Dymo, Expo, Parker, Elmer’s, Coleman, Jostens, Marmot, Rawlings, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert, Waddington and Yankee Candle. Writing segment consists of the Writing and Creative Expression business. Home Solutions segment designs, manufactures or sources and distributes a range of consumer products under various brand names. Commercial Products segment designs, manufactures or sources and distributes cleaning and refuse products. Its Baby & Parenting segment designs and distributes infant and juvenile products. NWL’s current market cap is $12.9 billion.

  • Dividend Yield: NWL pays an annual dividend of $.92 per year, which at its current price translates to an annual yield of about 3.46%. This is above with the industry average as well as the S&P 500 average of 1.9%.
  • Debt/Equity: NWL has a debt/equity ratio of .70. Their long-term debt has dropped since June of 2016 from a little above 1 to its current level. Anything below 1 is generally regarded as positive and manageable.
  • Earnings/Revenue Growth: over the last twelve months, earnings and revenue both decreased. Earnings declined at a greater rate than sales. I believe this is one of the main drivers of the stock’s drop over the past year, as the market tends to use earnings and revenue numbers as an early price indicator following an earnings report.
  • Free Cash Flow: NWL’s free cash flow translates to a Free Cash Flow yield of a little under 5%, which is less than I prefer, but still adequate. The company’s indicates that operating profits are more than adequate to service the debt they have.
  • Return on Equity/Return on Assets: ROE is 10.47, while ROA is 3.99.

Value Proposition for NWL

  • Current Price versus Historical Levels: While NWL’s downward trend began in June of last year, you can also make an argument that the stock has been struggling to sustain any kind of bullish momentum since August of 2016. The stock established its all-time high around $55 at that time before dropping down to the mid-$40’s through the first half of 2017 before staging a short-term rally back to the $55 price range in June of last year. In January of this year, the stock hit a trend low at around $24 per share, which is where I’m putting the stock’s most current resistance right now. The next nearest resistance level is around $29 per share.
  • P/E Ratio: NWL has a current P/E ratio of 10.42. This is significantly lower than the industry average, which is 22. It is also even further below the stock’s 5-year average P/E ratio, which is 31.8.
  • Price/Book Value: NWL’s Book Value is $28.94; this number has increased by more than 13% since June of last year and translates to a Price/Book ratio of .9. The average for the industry is 6.0, and the stock’s 5-year average Price/Book ratio is 4.4. A rally to par with its historical average would put the stock above $100, which is probably over-optimistic given the stock’s price history; but it does suggest that there is a very good basis for a long-term target back in the range of its all-time highs around $55 – a potential gain from the stock’s current price of more than 100%. The stock’s Price/Cash Flow ratio is also more than 30% below its historical average, which adds further strength to the stock’s undervalued status.

When the market has been bullish for as long as this one has, it isn’t often that a stock can be found trading at historical lows that can offer up a really good reason to double in price. Benjamin Graham, the man that mentored a young college student named Warren Buffett among others, and is considered the “father of value investing,” liked to identify stocks that were trading at a discount relative to a measurement he referred to as their “tangible value.” While the  measurement of Book Value doesn’t exactly match what Mr. Graham used, in today’s terms it is a pretty good reference point.

Warren Buffett himself refers to Book Value as the per-share amount that investors can expect to get back if the company closed up shop today. That means that for investors in NWL right now, the actual risk is very low; if that worst-case scenario actually happened, you’d actually get more back based on the stock’s Book Value than the price the stock is currently trading at. And since the historical average is much higher, the opportunity offered right now is nothing less than outstanding.

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