Should You Buy the Dip in This Direct-Selling Company?

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Tupperware Brands (NYSE: TUP  ) has fallen by more than 16% over the last month. The company reported lower than expected earnings on Wednesday, but the real reason for the fall seems to be the fear and uncertainty surrounding the direct selling business model. Is the dip in Tupperware a buying opportunity, or will the company get into the same kind of trouble as industry peers Avon (NYSE: AVP  ) , Herbalife (NYSE: HLF  ) , and Nu Skin (NYSE: NUS  ) ?

The numbers
For the fourth quarter of 2013, Tupperware delivered a sales increase of 1% in U.S. dollars and 5% in local currency. GAAP earnings per share of $1.81 came in below analysts' expectations of $1.84 per share, but adjusted earnings per share in local currencies increased by a healthy 12% versus the same quarter in the previous year. 

For 2014, Tupperware is forecasting sales to grow between 0% and 2% in U.S. dollars, while local currency sales are expected to deliver growth rates in the range of 5% to 7%. GAAP earnings per share are expected to be between $5.20 and $5.35 per share in the current year versus $5.17 per share in 2013.

The numbers show a deceleration versus previous quarters, and forward guidance is not particularly exciting, but the company still looks quite healthy, and moving in the right direction, even if weak consumer spending and currency headwinds are a considerable risk to watch.

In addition, Tupperware announced a 10% increase in dividends, bringing the quarterly payment to $0.68 per share versus a previous dividend of $0.62 per share quarterly. The company has raised its dividends every year since 2010, and payments have more than tripled in comparison to $0.22 per share back then. The recently announced dividend brings the forward dividend yield to an attractive level of 3.4%.

The stock fell by nearly 5.5% on Wednesday, aggravating the decline it suffered in the previous weeks. However, the situation does not look too dismal judging by financial figures, and Tupperware is now trading at an attractive valuation with a forward P/E of 13 and a considerable dividend yield.

Investors are selling direct-selling companies
The direct-selling industry has many advantages for investors, like a flexible business model allowing for rapid growth and relatively low capital reinvestment requirements. On the other hand, there have been several serious accusations regarding unethical business practices and pyramid schemes in the industry lately, so investors are understandably cautious when it comes to analyzing direct-selling companies.

Avon is trying to implement a turnaround, but things have not been easy for the company lately. The stock fell by more than 20% on Oct. 31, when Avon warned that federal regulators may seek to impose larger than expected penalties to resolve a long-running dispute over bribery accusations in China.

In addition, the business has been contracting over recent quarters: Total sales declined by 7% in the third quarter of 2013, with big regions like North America and Asia-Pacific showing particularly steep declines of 19% and 22%, respectively.

Herbalife has been in the spotlight for quite some time over accusations of operating a pyramid scheme. Renowned hedge fund manager Bill Ackman has vocally accused the company on multiple occasions, and Massachusetts Senator Edward Markey has recently sent letters to the SEC and the FTC to obtain more information about Herbalife's business practices. The New York Post reported on Tuesday that Canadian regulators have also launched a formal inquiry into the pyramid scheme business model complaints against Herbalife.

Chinese regulators have recently launched probes into Nu Skin after a report in local newspaper First Financial Daily accused the company of having a business model based on a pyramid scheme, exaggerating the virtues of its products in brochures, and "brainwashing" its sales representatives.

It's always hard to tell to what degree direct-selling companies are making their money by selling their products to end users versus resellers, who are usually consumers, too. The jury is still out when it comes to Herbalife and Nu Skin, but these accusations, combined with the deep problems Avon is reporting lately, are surely weighing on Tupperware in terms of investors' perceptions about the direct-selling industry.

Bottom line
Growth has slowed down at Tupperware lately, but its financial performance is showing no reason to panic about the future of the company. Furthermore, the stock is now trading at a very reasonable valuation and paying an attractive dividend yield. Investors seem to be understandably apprehensive when it comes to direct-selling companies, but Tupperware has not been accused of any wrongdoings, so the recent fall in the stock could easily turn out to be a buying opportunity for those who can withstand the short-term volatility.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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Related Tickers

9/4/2015 4:06 PM
TUP $51.78 Down -0.18 -0.35%
Tupperware Brands CAPS Rating: ****
AVP $4.42 Down -0.29 -6.16%
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HLF $56.55 Down -0.57 -1.00%
Herbalife CAPS Rating: *
NUS $45.24 Down -0.57 -1.24%
Nu Skin Enterprise… CAPS Rating: **