What happened
Shares of Newell Brands (NWL 2.74%) gained nearly 14% on May 3, following the release of the company's first-quarter earnings results early in the morning.
The company's sales continued to decline, falling 5.5% in the quarter but close to expectations, while its adjusted earnings of $0.14 per share was more than double the $0.06 per share Mr. Market was expecting.
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So what
The most positive part of Newell's earnings report was what's happening in its learning and development operating segment. The March 2018 liquidation of Toys R Us weighed heavily on this segment -- specifically the "baby" division within the segment -- over the past year, but this quarter the results improved.
Core sales fell 1.5%, a modest drop considering the company had $40 million in sales at Toys R Us in last year's first quarter. Profitability improved significantly: Operating margin was 15.2%, up from 10.9% last year, while operating income increased by $22 million to $88.5 million in the quarter.
Now what
While the learning and development segment showed solid improvement as the drag from Toys R Us lessens, Newell's consolidated business continues to burn through cash and its other segments aren't nearly as profitable.
The company burned $200 million in operating cash in the quarter, and reported a GAAP loss of $0.36 per share. In other words, there's some progress -- as the big jump in the stock price indicates -- but Newell still has a lot of work to do simply to get back to generating positive cash from its operations.
The company did close on the sale of some non-core assets on May 1, netting $735 million, but between its cash burn and the need to pay down its substantial debt balance, the company needs to quickly return to generating positive operating cash flows.
Management remains upbeat, sticking to the full-year guidance it set on the fourth quarter earnings call, for core sales to fall in the low single digits, and for the company to generate $300 million to $350 million in positive operating cash flows.
From this investor's perspective, I don't think the results so far show enough improvement to make Newell a buy. Until the company shows the ability to generate positive cash flows for multiple quarters, its dividend will remain at risk and it could be a value trap. It's worth putting on your watch list, but there's still too much uncertainty, and a cash-flow-negative company can quickly turn into a dividend trap.
