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NWL - Newell Brands Inc

woltac

By woltac
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DooDiligence Newbie

DooDiligence

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https://seekingalpha.com/article/4140864-buy-drop-newell-brands

 

At one times book and under 10 times EPS, it looks interesting, but is this one a falling knife?  The debt load is a bit scary.  I am a little gun shy after taking a hit on TEVA. 

 

Still looking at it.

 

Has anyone else on the board looked at Newell recently?

 

Thank god someone finally mentioned this.

 

They absolutely own the fishing category (Berkley, Shakespeare, Abu Garcia, Penn, Ugly Stick,) and they have a nice slice of the kitchen too.

 

If they could manage to unload everything except these 2 categories?

(I have difficulty seeing them getting disinter-mediated in either of these product lines.)

 

I've had the earnings conference call webpage bookmarked for days now, and just haven't managed to get to it yet.

 

What are your thoughts on the reliability of BV?

Debt & goodwill really ballooned after the Jarden purchase.

Someone here once said "if it ain't levered, you ain't doing it right" but there are definitely caveats in this statement.

 

One glaring wart, management seems inordinately proud of themselves for levering up...

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ander Newbie

ander

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Anyone been following lately? Seems like a lot of things have gone wrong -- many things that they couldn't control such as China tariffs, SHLD bankruptcy. But also timing of sales has been slower than expected and looks like debt paydown is a priority over share buybacks for now. Having said that SOTP now points to substantial upside. Icahn now owns 8%+.

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mwtorock Newbie

mwtorock

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Anyone been following lately? Seems like a lot of things have gone wrong -- many things that they couldn't control such as China tariffs, SHLD bankruptcy. But also timing of sales has been slower than expected and looks like debt paydown is a priority over share buybacks for now. Having said that SOTP now points to substantial upside. Icahn now owns 8%+.

 

i heard that it is more like Brett's idea in NWL, not Carl. but he has a good record too.

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kab60 Newbie

kab60

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Did you do a SOTP? I think it looks really messy and management is shit. High debt, weak cashflow. They might be saved by desperate private equity guys, but tariff uncertainty is probably a problem. Inclined to think there's value, but I think Spectrum Brands looks much better. Sure Icahn will get rid of Newells boss after cleaning the house, but Spectrum already has a guy that at least sounds really impressive. Plus.,,

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ander Newbie

ander

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Thanks. I've done a SOTP and I get a share price of $30 to $45, but of course depends on how much they get for their disposals, what their margins are going forward, and then the multiple on the remaining business. Obviously a lot more visibility once the disposals start happening. Right now, only ~20% of the way through on disposals.

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Broeb22 Newbie

Broeb22

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I've been chewing on this one for a while too.

 

The big question for me remains how much they can actually get in after-tax proceeds. I can't easily and conservatively get to that number myself, even on a gross basis (not net of taxes).

 

Waddington sold at 2.5x sales and Rawlings sold at 1.2x. I feel like Waddington was probably a coup. They make cheap plastic ware you might use at a summer barbeque or the plastic wine glasses you might see at a lower-key wedding/event. And assuming (guessing) a 20% EBITDA margin, the buyers paid 12.7x EBITDA. EBITDA margins could be higher, but I wouldn't bet on it.

 

They recently sold Goody hair products at an unknown price with $115 million in sales. An article in the WSJ estimates $32MM in EBITDA in 2018, down from $38MM in 2017. At a 10x multiple, they would get $320MM gross, a 2.78x gross multiple. Net proceeds should be relatively low given Newell bought this brand in 1993 for $170MM. Estimate: $283MM net proceeds.

 

The company projected originally to move from a $14.5 billion revenue company to a $9 billion revenue company. So the $10 billion in after-tax proceeds (approx. $13.3 pre-tax; 25% tax rate) figure assumes a 2.4x/1.8x sales multiple on a gross/net basis. How does one get to that when the entire EV today implies about a 1.12x  sales multiple on the company (using pre-divestiture 2018 sales estimates, which I would guess have been reduced in the interim)?

 

Results thus far on divestitures are mixed. What they have sold has been in line with targeted divestiture multiples but why haven't they announced more progress. They're only 23% of the way there, plus they had to add Jostens and Pure Fishing to the list of planned divestitures in May. Indicates they weren't seeing the interest they wanted to see with other assets.

 

I'm trying to take a significant hair cut on proceeds and still come out okay here.

 

Pro-forma FCF is tough to figure. They state pro-forma for divestitures and discontinued operations accounting they expect $0.9-1.2 billion of operating cash flow. I don't know what CapEx will be though. About $400 million total spent last year. If I'm being bullish, I cite the below from a NWL press release to support the notion that CapEX will decline at least 50% from 2017 figures.

 

 

"Execution of the Accelerated Transformation Plan will result in a dramatic simplification of the company’s operations:

 

66% reduction in the number of manufacturing facilities;

55% reduction in distribution centers;

58% simplification of the company’s retailer and distributor interfaces;

45% reduction in brands;

39% reduction in number of employees;

effective elimination of its unbranded businesses; and

reduction of more than 30 ERP systems to two by the end of 2019."

 

So maybe they're doing $800MM FCF pro-forma? Really murky and the management needs to go.

 

 

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ander Newbie

ander

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I'm doing similar math to you, but agreed the challenge is pinning down #'s when only ~20% of divestitures have been done. And I think the key is "How does one get to that when the entire EV today implies about a 1.12x  sales multiple on the company (using pre-divestiture 2018 sales estimates, which I would guess have been reduced in the interim)" -- in that where they are trading today versus what the divestitures will be sold for (in theory - lets see when the sales are made) is the massive discrepancy in valuation.

And that's all before giving them credit for efficiency improvements. There is a massive home run scenario here possible with a collection of many strong brands (that arguably should never have been put together in the first place).

Either way, they need to accelerate the pace at which they are moving.

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Spekulatius Newbie

Spekulatius

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Is this really cheap? I get about $470M in operating cash flow for the first 2 quarters and an EV of $16B.

Restructuring to reduce costs sounds good, but how much is this going to cost? Also going from 30 ERP systems to 2 us pretty much guaranteed to create problems. I feel this is still a bit early.

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kab60 Newbie

kab60

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Is this really cheap? I get about $470M in operating cash flow for the first 2 quarters and an EV of $16B.

Restructuring to reduce costs sounds good, but how much is this going to cost? Also going from 30 ERP systems to 2 us pretty much guaranteed to create problems. I feel this is still a bit early.

Agreed. Seems you get Jarden for free and the rest at a discount compared to when they bought it (but Newells could have been overvalued on its own and performance is worse today) but it's a massive restructuring - led by a clown. 30 ERP systems sounds like a friggin nightmare. Look at how much a company like Coty is struggling (debtfueled buyout party gone bad). This is on steroids.

 

Again, Spectrum Brands. Those Guys produce cash, CEO sounds smart, already did one massive deal to delever, really could use another but even if it isn't succesful I think they'll manage okay. Here it seems like you're betting a bit on dumb PE, and I actually think that's okay (1.1 trillion of dry powder) but you also have a massive restructuring and very little cash flow to show for it. I'm not smart enough here.

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Broeb22 Newbie

Broeb22

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It's a little bit more complicated than that.

 

You have to make an estimate of proceeds, which drives pro-forma debt, which drives pro-forma interest expense savings. They're paying almost $480MM interest expense right now. Most of that interest savings, adjusted for tax impacts and estimated share buybacks (i.e. less debt paydown), will accrue to equity holders. Their cost of debt will likely come down some too as the company deleverages.

 

Maybe an easier way to look at this is figure out FCFF now, estimate FCFF that is leaving the company via divestitures, and then subtract tax-effected interest expense from the pro-forma company to accurately estimate FCF.

 

When I go back to Jarden and Newell pre-combination, they were generating $800-900MM FCFE independent of one another. If you add back the current $360MM interest expense, net of 25% tax rate ($480MM of interest expense x 0.75x), the FCFF is about 1.23BN. Compared to a 16.3BN EV. A 7.5% unlevered FCF yield. Not a bad starting place, although some would argue the business is deteriorating. If you think results are roughly flat (some cost headwinds, offset by costs related to the restructuring) going forward, if they get $8BN in proceeds after tax, lose $500MM FCFF, and use 50% on debt at 7% yield and 50% on buybacks at $20 per share, then you have a $8BN EV generating $730MM FCFF, paying $280MM of interest ($210 net of 25% tax rate), and $520MM FCFE, relative to 280MM shares outstanding. Shares fall from 486 MM to 286 MM if you can spend $4BN on buybacks at $20 per share. So $1.86 FCF per share. At 8x, 12.5x, 15x, and 18x FCF per share, NWL would be worth $15, $23, $28, or $33.

 

I've seen some 8x FCF yields on CPG stocks these days, so not going to say 8x is impossible, the ones I've seen are more leveraged than proforma NWL. I've tried to be conservative/reasonable with pretty much each variable. Of course, if they do get $10BN in proceeds, and you use the same assumption on debt pay down/buybacks, NWL generates $2.42 FCF per share, and a 12.5 multiple is approximately $30 share price.

 

Disclosure: No position, but seems interesting. 

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ander Newbie

ander

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kab60 - curious re: your view on the CEO. Is it because of the crazy purchase of Jarden or as an operator or something else? He used to be revered by the buyside and sellside community - could do no wrong. Based on the feedback I've heard is that he's a great operator and was a decent acquirer except for the Jarden acquisition which was a disaster. Appreciate the thoughts.

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Spekulatius Newbie

Spekulatius

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Is this really cheap? I get about $470M in operating cash flow for the first 2 quarters and an EV of $16B.

Restructuring to reduce costs sounds good, but how much is this going to cost? Also going from 30 ERP systems to 2 us pretty much guaranteed to create problems. I feel this is still a bit early.

Agreed. Seems you get Jarden for free and the rest at a discount compared to when they bought it (but Newells could have been overvalued on its own and performance is worse today) but it's a massive restructuring - led by a clown. 30 ERP systems sounds like a friggin nightmare. Look at how much a company like Coty is struggling (debtfueled buyout party gone bad). This is on steroids.

 

Again, Spectrum Brands. Those Guys produce cash, CEO sounds smart, already did one massive deal to delever, really could use another but even if it isn't succesful I think they'll manage okay. Here it seems like you're betting a bit on dumb PE, and I actually think that's okay (1.1 trillion of dry powder) but you also have a massive restructuring and very little cash flow to show for it. I'm not smart enough here.

 

I agree on SPB being a much better bet than NWL, since they are further along with restructuring and should have any issues with their balance sheet. NWL still is in the messy phase of restructuring and has the bulk of work ahead of them. With restructuring, my rule is that it’s alway worse than you think

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kab60 Newbie

kab60

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kab60 - curious re: your view on the CEO. Is it because of the crazy purchase of Jarden or as an operator or something else? He used to be revered by the buyside and sellside community - could do no wrong. Based on the feedback I've heard is that he's a great operator and was a decent acquirer except for the Jarden acquisition which was a disaster. Appreciate the thoughts.

Mainly due to Jarden and his communication. If you do such a huge screw up you need to get booted. If you do it and stick around at least own up to it. I think it's laughable that you have an empire builder now talking about focusing etc. (one thing is shareholders... think about working for the guy). He might be a decent operator, but I think capital allocation and picking ones team is more important. I also recall looking at Newells in the 60s and being turned off by their comp and incentives (and the private jet).

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ander Newbie

ander

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https://www.marketwatch.com/story/newell-brands-stock-jumps-after-adjusted-earnings-beat-raised-outlook-2018-11-02

 

The company raised its 2018 adjusted EPS guidance range to $2.55 to $2.75 from $2.45 to $2.65, and maintained its sales outlook of $8.7 billion to $9.0 billion. Holiday season is here.

 

Agreed - I am positively inclined, but remains to be seen how they do on their asset disposals.

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ander Newbie

ander

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Has anyone downloaded Starboard's May 2018 Presentation on this company? It's no longer on their website, and I would appreciate it if someone could share-thanks.

 

EDIT: Disregard.

 

https://web.archive.org/web/20180712171215/http://www.starboardvalue.com/wp-content/uploads/Starboard_Value_LP_Transforming_Newell_Presentation_05.01.2018.pdf

 

This link should work. I continue to own but I've been re-visiting to consider adding and believe it sets up extremely well from here. New CEO search process underway. New CFO has kitchen-sinked numbers. No one is giving them any credit for returning any where close to historical margins. The polar opposite of what Wall Street was doing only a couple of years ago. Risk is the new CEO wants to set an even lower bar - though I doubt it since I believe CFO has been extremely conservative - also reasonable chance that the CFO becomes CEO.

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