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Stock Analyst Update

Newell's Stock May Have Little Upside through 2000

Its price hikes amid slowing demand sour growth prospects.

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What Happened?
Newell Rubbermaid (NWL) warned that its third- and fourth-quarter earnings would fall beneath expectations due to a triple whammy of sluggish demand, higher raw-material prices, and a weak euro. Newell had expected earnings growth in the second half of the year to be in the high teens, but instead it foresees single-digit profit growth. Newell will continue its strategy of raising prices to offset higher raw-material costs even though consumers have balked at higher prices.

What It Means for Investors
We warned investors two months ago of a possible earnings disappointment, and we still think investors should avoid Newell as its growth strategy has hit a wall. Consumer demand for its products in Europe and in the United States is slowing because Newell raised prices in order to offset higher prices for resin--the main raw material for its core plastic-container business. 

It has had to raise prices to save margins since cost-savings from its Rubbermaid merger are running out. Although the integration of Rubbermaid is almost done, Newell's operating margin for the first half of the year was still a couple of percentage points below its post-merger target.

Newell's price strategy is failing because its rivals are not following with their own price hikes, which gives consumers an alternative place to shop. And Newell's sales growth this year is already being cut by a weak euro, as 15% of total sales are derived from Europe.  Unfortunately, management's assurance of a stronger euro in the third quarter and a decline  in resin prices failed to materialize.

Thus, Newell's management must also contend with a credibility problem. A decline in resin prices would jump-start earnings growth, but no one can predict when that will happen. With the timing of Newell's profit turnaround uncertain and, to some extent, out of its control, even its low forward P/E of 11 doesn't make Newell a buy.

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