Tuesday, December 23, 2008

Newell Rubbermaid Revisited

A few months ago, Reyer looked at Newell Rubbermaid (NWL), the maker of several brand name products including Sharpie, Paper Mate, Parker, Rolodex, and Rubbermaid. At the time, NWL traded at $19 per share, and Reyer concluded that there was little value to be found in this stock.

Last week, however, the stock dropped over 25% in one day as the company reduced profit expectations for 2008 and 2009, and announced job cuts and temporary plant closures. As a result, the stock now trades at just $9.50 per share, a 50% discount to where it was when Reyer wrote about it just a few months ago, bringing the P/E to just 8 and the dividend above 8%.

Has the long-term value of the company's brands and earnings power changed that much in the last few months? It appears unlikely. There is no evidence to suggest the earnings reductions are related to anything more than the current downturn. The company's large diversified stable of products offers some protection against a permanent decline in any one product.

One risk the company does have is its debt level. Employing higher than normal debt/equity levels offers stable companies cheaper access to capital, and since NWL has traditionally been a very stable business, it has a D/E of 1.5. If this is a long and protracted downturn and the company is unable to reduce costs in line with revenues, this debt level will become a large burden. As part of a diversified portfolio, however, NWL now appears to offer great long-term value.

Disclosure: None

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