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NWL is on the tape this morning, and the quarter is decidedly unimpressive despite the optics of the better than consensus EPS result.  Adjusted “core” sales grew 2.5%, right smack in line with the company’s annual guidance, but you have to torture the numbers a bit to get there.  EPS was flattered by a lower tax rate, and the company changed the pacing of the quarterly EPS progression, so less Q2 and Q3 and more Q4.



What we liked:

  • Beating consensus is better than the alternative
  • Maintained full-year EPS guidance despite the dilutive ($0.03 per share) sale of assets
  • Sale of underperforming businesses (Bulldog, Ashland, Amerock, etc.) should be accretive to margins as well as the company’s revenue growth profile (60 bps accretive to top line based on the last three years and 40 bps accretive to EBIT margin)
  • Strategic spending behind the brands set to accelerate sequentially through 2013

What we didn’t like:

  • In Q1 2012, the company called out the timing shift of $28 million in sales associated with the European SAP conversion (pulled forward from Q2 into Q1).  This quarter, the company “normalized” the Q1 2012 income statement for SAP, rather than simply calling out the tougher sales comp.  It appears to us the company got the “benefit” of higher EPS last year, and this year wants to flatter the year over income statement comparisons by normalizing EPS.  It isn’t sitting right with us.
  • Lower tax rate (16.5%) versus our model added approximately $0.04 to earnings in the quarter
  • Company benefitted from lower advertising spend in the quarter due to period of management transition
  • Accounts receivable jumped 8.4% in the quarter
  • FCF declined substantially despite lower capital spending in the quarter
  • Writing business to suffer from consolidation of the U.S. office superstore channel (“overhang on the U.S. Writing business for some time to come”).  The company was asked about this specifically at CAGNY and stated it wouldn’t be a factor – it appears to be now.
  • Guided down Q2 and Q3 (“normalized EPS will be much more evenly distributed across the remaining three quarters of the year then it has been in past years”) – this implies a lower Q2 and Q3 and a higher Q4 – have to watch consensus here.

Our expectations were modest for the quarter, and the company managed to slide in under them, but there wasn’t anything in the quarter sufficient to move us off our decidedly positive view on the name.  We can still see a path to $1.80 per share in FCF over time and a stock price that more appropriately reflects the average staples multiple of FCF (15-20x).

 

Call with questions,

 

Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst