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Stock Analyst Update

Still Too Early to Embrace the New Newell

Rubbermaid has turned profitable, but firm's targets too optimistic.

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Newell-Rubbermaid (NWL) may have reported impressive second-quarter operating income growth of 22%, but the company is too optimistic in thinking it has left behind the high costs that have dogged it since doubling its size last year with the acquisition of Rubbermaid.

Given the risks of its rosy cost assumptions, there is a possibility of a profit disappointment for the remainder of the year. And it was easier than it seemed to post this quarter's profit growth, as it came against a 10% decline a year ago. 

There are some early signs of a turnaround that could result in reliable single-digit sales growth and low-teen earnings growth over the long term following the overall 1% operating profit decline last year. Even though sales were flat, income at its largest division, plastic storage and organization, grew 43% because of  massive cost-cutting initiatives at Rubbermaid. After posting a $190 million loss last year, Rubbermaid is profitable now that it's undergoing the storied "Newellization" program, which involves boosting operating margins to 15% at acquired companies.

In fact, Newell wrung out $52.8 million in expenses from Rubbermaid, which offset the $43.4 million increase in raw-material costs. This increase came largely from resin, which is required to make most of Rubbermaid's products, and it's here that Newell is too optimistic going forward.

The company estimates only $40 million to $45 million in cost savings in the second half of the year, but it's also assuming much lower resin prices. Prices of resin ingredients have just recently started to decline and can be extremely volatile as resin is derived from oil. Given the uncertain oil price outlook, raw-material prices could quite possibly outpace cost savings in the second half. To be sure, Newell is raising its prices by 3% to 8%, but that may only partly mitigate increased costs.

Newell is also assuming no further interest-rate hikes and a healthy recovery for the euro against the U.S. dollar in the remainder of the year. Considering its debt has increased by 30% from a year ago and that about 15% of total sales come from Europe, Newell is even more vulnerable to cuts in growth forecasts as the year progresses.

The stock may have a low forward P/E of 14, but with Wall Street expecting upwards of 20% earnings per share growth this year, it may be wise to avoid the stock given the risks for profit disappointment.

Harry Milling does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.