When it comes to American business history, Whirlpool (NYSE:WHR) and Newell Rubbermaid (NYSE:NWL) stand out; each 100 years old and still going strong. The economic malaise has been tough on both companies, and nowhere is this more evident, than in the performance of their stocks so far in 2011. As of October 14, Whirlpool is down 37.6% and Newell Rubbermaid 27.3%. Both are potential value plays, but which is a better buy? (To help you choose the right stocks for your portfolio, see How To Pick A Stock.)
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The first metric to decide the better of the two companies is enterprise value to EBITDA, which allows companies with differing capital structures to be compared side-by-side. Whirlpool's current enterprise value is 4.04 times EBITDA while Newell Rubbermaid's is 7.14 times EBITDA. Newell Rubbermaid's EBITDA margin is considerably higher than Whirlpool's, yet its total debt is identical at $2.5 billion, which means that it's had to borrow excessively in order to generate additional revenues.
The second valuation is the price-to-sales ratio. Newell Rubbermaid's is 0.66 compared to 0.23 for Whirlpool. Investors are currently willing to pay a lot more for every dollar of revenue Newell Rubbermaid generates. Given Whirlpool's debt to capital ratio is 36.4% and Newell Rubbermaid's is 53.7%, investors are clearly overpaying. When it comes to valuation, the advantage goes to Whirlpool. (For more on ratios and how you can use them to value your investments, read Analyze Investments Quickly With Ratios.)
|Newell Rubbermaid (NYSE:NWL)||7.16||0.66|
|Acco Brands (NYSE:ABD)||6.57||0.23|
|Avery Dennison (NYSE:AVY)||6.28||0.43|
As mentioned above, Newell Rubbermaid's margins are higher than Whirlpool's, in part, because of the use of debt in its capital structure. Its trailing twelve-month operating margin is 12%, 700 basis points higher than Whirlpool. However, its trailing twelve-month revenue is just 2.3 times its total debt, meaning it's taking on $1 of debt for every $2.30 in revenue, compared to $1 of debt for every $7.42 of revenue at Whirlpool. Higher margins are great, but only if secured without gorging on additional debt. Put another way, Whirlpool generates $4.21 of revenue per share for every $1 in book value, compared to $2.70 of revenue per share for Newell Rubbermaid. Whirlpool clearly uses its capital more efficiently.
Cash Flow Statement
Between 2001 and 2010, Newell Rubbermaid generated $5 billion in free cash flow, $1 billion more than Whirlpool. This fact makes it harder to understand why its debt is so high and it has so little cash. Blame the dividend. Despite a multi-year restructuring that's still going on in Europe, the company continued paying its 84 cents a share dividend, despite the fact it was sustaining substantial yearly losses. In four out of the last 10 years, Newell Rubbermaid paid a dividend that was higher than its earnings per share and it didn't stop the practice until 2009. That just doesn't make any sense. Once more, advantage Whirlpool.
Newell Rubbermaid's debt levels seem troubling, especially when you consider it could have avoided some of it with a sensible dividend policy. Whirlpool's stock trades at 5.2 times its cash per share of $11.06, compared to Newell Rubbermaid that trades at 26.6 times its cash per share of 52 cents. Whirlpool does a much better job hanging on to its cash. The final advantage goes to Whirlpool.
Both companies have some excellent brands. There's no question, however, that once the details are all broken down, Whirlpool is the better stock. (For more on valuing stocks, check out The 4 Basic Elements Of Stock Value.)
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