We maintain our long-term Neutral recommendation on Newell Rubbermaid Inc. (NWL) with a target price of $20.00 per share. Moreover, the company has a Zacks #3 Rank, implying a short-term Hold rating.
Newell is one of the leading manufacturers of home and office products in the U.S. The company possesses a strong portfolio of well established brands, providing a competitive edge over its rivals.
Newell Rubbermaid delivered better-than-expected first-quarter 2012 results on the heels of increased volume coupled with lower structural SG&A expenses and lower effective tax rate, partially offset by higher input cost inflation. The company’s quarterly earnings rose 13.8% to 33 cents per share from the prior-year quarter, beating the Zacks Consensus Estimate of 31 cents.
Moreover, management reiterated its outlook for fiscal 2012. The company still expects earnings to grow in the range of 2% – 6% year over year to $1.63 – $1.69 per share in fiscal 2012 and projects operating margin expansion of 20 basis points on the heels of core sales growth of 2% – 3%.
We believe that Newell’s ongoing Project Renewal initiative will facilitate the reduction of the complexity of the organization while increasing investments in most important growth areas within the business. Therefore, the company is expected to save costs between $90 and $100 million through its Project Renewal program by the first half of 2013.
Moreover, Newell’s ‘European Transformation Plan’ is expected to be completed by 2012. The plan aims to revamp its European organizational structure and processes in order to integrate certain operating activities, leverage the benefits of scale and contribute to the effective implementation of an enterprise resource planning program in the region. The company expects to realize annual savings of $55 to $65 million from the plan.
However, the company is heavily dependent on a handful of customers, including large discounters, department stores, home centers, warehouse clubs and office superstores. The company’s principal customers are in the continuous process of evaluating which product suppliers are to be used. This considerably reduces Newell Rubbermaid’s pricing power against these giant retailers, thereby exerting pressure on margins while limiting profitability.
Further, the company’s results may be adversely affected due to Newell’s substantial exposure to international markets. A rise in the company’s product price to offset increasing input cost may have a direct impact on its product demand.
Above all, Newell Rubbermaid faces intense competition from numerous manufacturers and distributors of consumer and commercial products, such as Cooper Industries plc (CBE) and Avery Dennison Corp. (AVY). In such a competitive environment, the company has to focus more on pricing, big consumer brands, introduction of new products, and customer service to retain its market share in the industry.
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