Morgan Stanley is upgrading Newell Rubbermaid (NYSE:NWL) to Overweight from Equal-Weight while raising their price target on the name to $18 (prev. $16).
Firm notes the upgrade is based on their belief the risk/reward is very attractive for the stock. NWL is currently trading close to trough valuation on trough earnings after significant underperformance versus peers and the discretionary consumer index (~1400 bps of underperformance versus the XLY since 8/18/09). The market is not giving NWL credit for key positives, including a) a potential macro-driven topline recovery in 2010, and b) potential market share gains on a recent increase in strategic SG&A spending (advertising and R&D) and strong 2010 innovation pipeline.
Why They Are Becoming More Bullish:
1) The market now expects a late-cycle macro recovery for Newell. Previously, Morgan Stanley believed Newell was more exposed to a late cycle economic rebound than consensus anticipated. However, given NWL commented on its Q4 EPS conference call that 2010 organic sales growth would be back half weighted, they think this risk point is now in the stock, particularly given underperformance after Q4 results.
2) Pricing/cost risk less of a concern. Previously, the firm was concerned that Newell would not be able to fully pass on higher 2010 commodity costs through pricing, but they are less concerned about pricing/cost risk after an in-line slightly positive 4Q09 pricing result. In addition, Newell’s management team indicated that the promotional environment has not worsened in Newell’s key product categories in Q4, in contrast to most other household products categories. Lastly, some of Newell’s competitors have already announced price increases in the Rubbermaid business segment, which we expect Newell to follow.
3) Attractive valuation after recent under-performance. Newell’s valuation is attractive at 8.4x 2011e EPS and 6.5x EV/EBITDA (after adjusting for convertible dilution) and a 12% 2011e free cash flow yield, at the low-end of MSCO coverage universe. Since August 19, Newell’s stock has underperformed the discretionary consumer index by over 1400 basis points, the S&P 500 by ~900 basis points, and MSCO's SMID-cap HPC coverage universe by ~600 basis points, making NWL’s valuation more compelling.
Attractive Risk/Reward
Morgan Stanley's base case scenario $18 price target offers compelling 35% upside in the stock and is based upon a conservative 11.0 times 2011 P/E multiple at a 17% discount to the S&P 500 (in-line with Newell’s three-year historical 17% NTM discount). They are also 2% ahead of consensus in 2011 given their forecast for a macro-driven topline rebound.
In addition, they think variance versus their base case skews to the upside. Morgan Stanley's bull case scenario offers even more significant 87% upside in the stock, and assumes an incremental 150-bp macro-driven topline recovery, 100-bp of topline upside from market share gains, and 1% incremental cost-cutting. In contrast, their bear case $12 scenario offers only 10% potential downside in the stock given limited valuation compression since NWL’s valuation is already at the low-end of peers.
Notablecalls: I think this one has a fair chance of seeing some buy interest today. It's the kind of a household name investors tend to flock to during times of greater than usual volatility (uncertainty) as it provides a kind of a safe haven.
Getting blessed by Morgan Stanley with a decent target & potential for even higher returns, this looks like a bet one should consider.
It's going to trade close to $14 level today, I suspect.
Firm notes the upgrade is based on their belief the risk/reward is very attractive for the stock. NWL is currently trading close to trough valuation on trough earnings after significant underperformance versus peers and the discretionary consumer index (~1400 bps of underperformance versus the XLY since 8/18/09). The market is not giving NWL credit for key positives, including a) a potential macro-driven topline recovery in 2010, and b) potential market share gains on a recent increase in strategic SG&A spending (advertising and R&D) and strong 2010 innovation pipeline.
Why They Are Becoming More Bullish:
1) The market now expects a late-cycle macro recovery for Newell. Previously, Morgan Stanley believed Newell was more exposed to a late cycle economic rebound than consensus anticipated. However, given NWL commented on its Q4 EPS conference call that 2010 organic sales growth would be back half weighted, they think this risk point is now in the stock, particularly given underperformance after Q4 results.
2) Pricing/cost risk less of a concern. Previously, the firm was concerned that Newell would not be able to fully pass on higher 2010 commodity costs through pricing, but they are less concerned about pricing/cost risk after an in-line slightly positive 4Q09 pricing result. In addition, Newell’s management team indicated that the promotional environment has not worsened in Newell’s key product categories in Q4, in contrast to most other household products categories. Lastly, some of Newell’s competitors have already announced price increases in the Rubbermaid business segment, which we expect Newell to follow.
3) Attractive valuation after recent under-performance. Newell’s valuation is attractive at 8.4x 2011e EPS and 6.5x EV/EBITDA (after adjusting for convertible dilution) and a 12% 2011e free cash flow yield, at the low-end of MSCO coverage universe. Since August 19, Newell’s stock has underperformed the discretionary consumer index by over 1400 basis points, the S&P 500 by ~900 basis points, and MSCO's SMID-cap HPC coverage universe by ~600 basis points, making NWL’s valuation more compelling.
Attractive Risk/Reward
Morgan Stanley's base case scenario $18 price target offers compelling 35% upside in the stock and is based upon a conservative 11.0 times 2011 P/E multiple at a 17% discount to the S&P 500 (in-line with Newell’s three-year historical 17% NTM discount). They are also 2% ahead of consensus in 2011 given their forecast for a macro-driven topline rebound.
In addition, they think variance versus their base case skews to the upside. Morgan Stanley's bull case scenario offers even more significant 87% upside in the stock, and assumes an incremental 150-bp macro-driven topline recovery, 100-bp of topline upside from market share gains, and 1% incremental cost-cutting. In contrast, their bear case $12 scenario offers only 10% potential downside in the stock given limited valuation compression since NWL’s valuation is already at the low-end of peers.Notablecalls: I think this one has a fair chance of seeing some buy interest today. It's the kind of a household name investors tend to flock to during times of greater than usual volatility (uncertainty) as it provides a kind of a safe haven.
Getting blessed by Morgan Stanley with a decent target & potential for even higher returns, this looks like a bet one should consider.
It's going to trade close to $14 level today, I suspect.
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