Why Newell Brands' $NWL turnaround strategy is fundamentally sound.

Trying to find the signal through the noise.

Capital markets are a second career for me, and after ten years of paying my dues in my first career, I knew that I didn’t have it in me to do things the hard way again.  I have become obsessed with trying to find those pieces of information which are the signal through the noise and can dominate a large number of other concerns.  

When I heard a quantitative fund manager say that they no longer use insider transaction data because they didn’t add anything to the models, I had a strong suspicion I knew why.  Quantitative analysts typically include all the data available, but it’s a dirty little secret of statistics that the parsimonious model is often the best.  Of course if you plug all insider transactions into a regression you will get noise, insider sales are worthless.  But insider buys?  The signal gets stronger, only 20% of C-suite executives ever engage in insider buying.  Amazingly, four fifths of corporate management are salaried bureaucrats in their own minds, never once considering being a capitalist and taking advantage of the fact that they know more about this business than anyone else in the world.  Which C-suite executive is buying?  The signal gets stronger still, I have seen situations where the market is concerned about ongoing litigation but the chief legal officer is buying the stock and nobody notices!  The CEO is known to be optimistic, some part of leadership requires smoking your own brand to inspire the troops.  But the CFO is pessimistic by nature, counting beans and preparing for worst case scenarios.  When I see a situation where a CFO is buying the stock, I pay attention.  If the CFO is buying in size, I stop what I am doing and drill down deep.  

Now ladies and gentlemen, allow me to introduce Mega Chad Mark Erceg, a man who is not afraid to put his money on the table and be a capitalist in a world full of managerial bureaucrats.  

That’s right, Mega Chad Mark Erceg dropped $3 million in cash out of his own checking account and bought stock in the company where he is the CFO, has access to all the numbers, and knows where all the skeletons are buried.  If that isn’t signal through the noise, then I don’t know what is.  Now this isn’t permission to not do your due diligence, but starting from this point, with a pretty strong probability that there is cheese at the end of this maze, the due diligence is way more fun.  

I listen to way too many conference calls.  It’s how I convince myself that I am adding value.  I found it interesting how Nestle was handling the post Covid slowdown period, they cancelled many of their lowest margin products.  Just axed them, never to be produced again.  This is one of the ways that corporations defended their margins when all the pundits were calling for mean reversion on corporate profitability.

A lot of stocks right now have not rebounded post Covid, their CEOs discuss their turnaround strategies on their earnings calls, and they are not all created equal.  An example of a business who’s turnaround strategy leaves a lot to be desired is United Natural Foods (UNFI).  These guys do not instill confidence with their plans.  They are so far behind the eight ball that they are still in the process of consolidating operations from acquisitions that took place half a decade ago under previous management.

Newell Brands (NWL) is an example of a management team that does instill confidence with their turnaround strategy which mirrors what Nestle did before them.  NWL is a conglomerate of brands of somewhat durable products which are mostly cyclical, potentially a few staples, some high end, some low end, pretty much all over the place. You’ll recognize the brands when you see them, but their moats aren’t so amazing that management can rest on their laurels.

Every one of their brands has their own story, Yankee Candle suffered with the shutdown of Bed Bath and Beyond.  Coleman camping equipment over-earned during Covid when the nation temporarily embraced the great outdoors.  Office supplies are suffering from the work from home phenomenon.  Graco and NUK might have their day in the sun if Taylor Swift and Travis Kelce decide to spark a national baby boom.   But for the most part, business will thrive again when the American consumer is not so squeezed by their falling real wages.

It will take about two years or more for there to be enough green bars above the line to recover the real earnings which were lost from the Cantillon effects of the massive monetary stimulus during Covid.  Until then, people might not replace their old Rubbermaid containers, Oster blenders, or Calphalon pans.  In the meanwhile, management needs to execute at a high level, tighten their belt, and do their best until the cycle turns back in their favor.

In the last two quarters since implementing their turnaround strategy, EBITDA is up from $566 million to $647 million.  Still not profitable yet, but improving.  The debt situation isn’t fantastic with $500 million maturing in 2025 and $2 billion maturing in 2026.  They won’t get a 4.2% interest rate again.  Interest expense for 2023 was $285 million, but if half their debt is refinanced with their BB debt rating, yield to maturity on their 2036 debt is 7.3%.  That would put interest expense after 2026 at around $370 million.  Not terrible when you consider a return to more normal times could put their EBITDA around $1.5 billion.

EBITDA:

You can really see the Covid over-earning period as people moved out to the suburbs and outfitted their new homes.  And you can also see the sudden dropoff that started toward the end of 2022 when the stimulus checks ran out and interest rates froze the housing market.  

There isn’t much more to say, management seems competent, the debt situation isn’t dire.  They should be able to find efficiencies as the cyclicality of the market brings them closer to their next day in the sun.  When that happens, the stock price should improve.  Price to Sales, Price to Earnings, and Price to Book all imply that when their situation stabilizes, the stock price should be somewhere between $20 to $30, or about a 3x - 4x from here.  

Stock Price:

I usually stay away from midcaps, and a $10 billion revenue at the peak brand conglomerate is not my style.  In a Peter Lynch fashion, I am familiar with all their products, I understand them, but they aren’t the busiest kiosk at the mall.  There are no amazing moats, but there is little threat of obsolescence, and there is very decent international exposure at 37% of revenues and room for growth.  Their near term liquidity is fine, so there shouldn’t be any dilution.  The long term debt is sustainable.  The management team proposed a specific turnaround plan, and for two quarters they are doing what they said they would do and are getting results.  And then there is Mega Chad Mark Erceg, I would follow him into battle.  As a generalist I know that I have my limits in understanding the nuances of this business, but that gets washed away when the CFO who has all the numbers and decades of experience in the industry girds up his loins and signals that $15 for this stock is too cheap by dropping $3 million straight cash buying it.