Shares of Atlanta-based Newell Rubbermaid (NYSE:NWL) dropped 7.5% after management revised guidance downward due to weakening consumer demand last Monday. The consumer and commercial product maker now expects sales to increase between 3% and 3.5% for the full year.
This is a considerable decrease from previous guidance of 4% growth, but the selling seems a bit overdone when accounting for the overall strength of the business.
Disappointing, But All Is Not Lost
It is never a good thing to hear a company lowering guidance, but reality is setting in the minds of corporate executives. And that is not necessarily a bad thing. Cisco (Nasdaq:CSCO) recently sent the whole market down, after its management didn't raise company outlook, as usual. This caused its shares to plummet even after reporting a great quarter. I think it is important for a company to recognize softness in the economy, and the effects its business will incur. This is what Newell is doing, and its shares are now being punished for it. (For related reading, check out Whisper Numbers: Should You Listen?)
EPS Guidance Unchanged
While decreasing annual guidance, Newell reported that fourth quarter sales "will be essentially flat to those recorded a year ago". By recognizing demand weakness from its consumer base, the company is able to better adapt through cost cutting or other ways of continuing earnings growth. That is why I feel it is most important to note that while Wall Street analysts began cutting earnings estimates, the company left its earnings per share guidance unchanged.
Newell is able to do this because it has been increasing the core profitability of the business through profit margin expansion. The company has been quite impressive lately. Before the third quarter it guided quarterly EPS between 48-50 cents, and then beat even the high end by reporting 52 cents per share.
Strength At Its Core
While the company is voicing its concerns of consumer troubles, Newell sells products that are essentially consumer staples rather than discretionary items. It has office products lines (Sharpie and Paper Mate) and family necessities lines (Rubbermaid and Graco). While some of Newell's products might be easier to substitute than products from pure consumer staples, like Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG), it will not feel the consumer pinch as much as luxury brand companies.
With shares currently trading at 15.9-times earnings, and an inherent stability of the company in an unstable market, I think the stock looks attractive. Annual EPS looks to come in relatively unchanged, but with a nice 3% dividend, this is a stock that should weather the storm while waiting for the consumer to recover.
The Bottom Line
With the chaotic markets lately, Newell is an attractive stock to park some money, especially after its drop. The company has good long term prospects for patient investors who want a little more stability in their portfolio.
For more on the importance of defensive stocks, check out Surviving Bear Country.
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