What's Up With Tupperware?

For long-term holders of Tupperware (NYSE:TUP), a Motley Fool Income Investor pick, the champagne for the next Tupperware party has been held on ice. The shares have basically treaded water over the past five years, now worth less than half their 1997 prices. However, the shares may be worth a look to the value crowd, given their decent valuation and favorable dividend yield.

In the first-quarter earnings Tupperware reported April 25, sales increased 30% -- 34% on a local-currency basis. Earnings per share came in at $0.26, ahead of previous guidance of $0.22-$0.24 per share. Negative foreign exchange translations dented results by $0.04 per share.

In the flagship Tupperware segment, sales were generally weak across the board, down 11% in Europe (down 4% in local currencies). Europe represents almost half of total sales and is by far the company's most profitable region. Results continued to be weak in the U.S., down 12%, but rose 2% in the Asia Pacific and Mexico regions. In the Beauty Brand segment, international organic sales increased 1%, while North American sales logged a 3% increase.

Management also offered a second-quarter and fiscal 2006 outlook. It expects Q2 sales of $445 million-$450 million, and EPS in the range of $0.44-$0.46. It also lists a term it entitles "EPS after adjustments," which includes items related to an acquisition of certain Sara Lee (NYSE:SLE) direct-selling businesses but excludes items management considers non-operating. For the second quarter, Tupperware expects EPS after adjustments of $0.49-$0.51, up 9%-13% year over year. For the full year, it projects sales of $1.75 billion-$1.8 billion, EPS of $1.53-$1.63, and EPS after adjustments of $1.72-$1.82.

Tupperware's historical track record has been rather anemic. Sales have grown slightly less than 4% annually over the past five years, while earnings have grown a measly 2% annually in that time. Fortunately, the stock sports a 4.1% dividend yield, so investors are getting paid to wait for more consistent growth. However, Tupperware has a substantial debt load, with a debt-to-capital ratio around 70%.

Since Tupperware's cash flow is visible and predictable, it can probably sustain that higher-than-average debt. But when a debt-to-capital ratio surpasses 50%, I start to worry; any significant downturn in the business could make it more difficult to make interest payments or repay debt when it comes due. Though return on equity is impressive at nearly 24%, return on capital is less robust due to the high debt levels, coming in at less than half of ROE over time.

Strong free cash flow levels and a compelling distribution model keep value investors hovering around the stock. Avoiding typical retail channels, Tupperware sells its storage, serving, beauty, and personal-care products directly to consumers. According to the company, it has an independent sales force of 1.9 million people and operates in 100 countries outside the U.S. This model cleverly eliminates the middleman, much like Berkshire Hathaway's (NYSE:BRK-A) GEICO auto insurer, or Avon Products (NYSE:AVP), with its direct sales of makeup and beauty supplies. One less hand in the cookie jar means higher margins and more competitively priced products.

The direct-sales model is especially compelling in international markets with lower income levels, because it creates incentives for individuals to sell products. In countries with less developed retail infrastructures, direct sales are an ideal way to get goods into consumers' hands. There's a good reason why 81% of Tupperware's sales take place outside of the U.S.

There's no doubt that Tupperware has had its share of issues, especially in more mature markets. Management can't seem to get its operational house in order for consistent sales and earnings growth, and it keeps issuing unnecessarily complicated financial statements. But with the current valuation of just under 17 times trailing earnings and about 11 times next year's consensus earnings, a favorable dividend yield, and a competitive business model, the shares are worth tracking. For now, the stock remains in a value trap -- the proverbial watched pot that just won't boil.

Tupperware and Sara Lee are Motley Fool Income Investor picks. Stock up on the market's best dividend-payers with a free 30-day guest pass.

Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.