Today, we continue our search for reasonably-valued stocks among the consumer non-cyclicals. Yes, a snoozer quest if there ever was one. So have some coffee or Vivarin by your side, because we're venturing deep into the land of the truly boring.
As encouragement to stay awake for this journey, consider that today's subject, Tupperware
Tupperware is one of those companies that's so common, so mundane that you probably have never thought of it as a potential investment. Who woulda thunk those plastic food storage containers could be so darn profitable? But they are -- with net margins averaging 6.9% over the past five years.
The key to Tupperware's profitability is its direct-sales model. The company has over 1 million direct-sales reps who sell the products by hosting "Tupperware parties." Product demos, freebies, and, yes, peer pressure help make the parties a success. And by avoiding the traditional retail channels, Tupperware enjoys gross margins upward of 65%, more than twice that of competitor Newell Rubbermaid
Another interesting nugget about Tupperware is that it operates in over 100 countries. In fact, sales in foreign countries have averaged around 80% of Tupperware's total sales over the past five years. This is a truly global company.
And pertinent to our discussion here, Tupperware is a quintessential consumer non-cyclical. Sales of the well-known plasticware -- including premium food storage, preparation, and serving items -- have practically nothing to do with the business cycle. As much as leftovers are a constant in life, so too are the sales of Tupperware containers.
If anything, Tupperware's sales have been too constant -- to the point of being stagnant. Over the past five years, annual sales have been stuck around the $1.1 billion mark. But one man's stagnation is another man's consistency. Even without growth, I like that Tupperware has been consistently profitable over those years, while consistently paying its $0.22 quarterly dividend.
A mid-season slump
Of course, that dividend has been small consolation to shareholders who over the past five years watched their investment dwindle by 47%. Tupperware's woes have largely centered around struggles to get the U.S. business on track.
Recently, Tupperware has been in a profit slump, especially its North American business. In Tuesday's second-quarter earnings release, management said that the North American business is unprofitable so far this year and, at best, on its way to a break-even year. That drag on profits caused earnings guidance for the year to be reduced to $1.18 to $1.26 per share, down from earlier forecasts of $1.40 to $1.50.
At a current share price of $15, Tupperware trades for about 12 times expected 2003 earnings. Think about that -- a 12x multiple on depressed earnings. Even if those earnings don't grow, that's not a bad price for a sturdy business. Oh, and by the way, the price-to-free cash flow multiple is an even juicier 8.7x.
Despite the market's depressed attitude towards Tupperware, the North American business is in no way impaired permanently or even semi-permanently. Most of this year's lost profits are the result of a failed distribution deal with Target
Still a lot to like
So as of September 1, Tupperware will be out of Target. While the move may be chalked up as a failure, I appreciate management's willingness to experiment with new sales models. That spirit of experimentation will, in the long run, serve shareholders well.
In addition to everything already cited, I see several other positives worth noting:
1. Diligent reduction of debt
In addition to paying its dividend, Tupperware has been using its free cash flow to pay down its debt load. As of the most recent quarter, Tupperware's net debt (total debt less cash) was down to $249.9 million, a marked improvement from $331.9 million a year ago. At present, Tupperware's debt-to-total capital ratio is 57%, and the company is aiming to bring that ratio down to somewhere below 55% by year-end.
2. Insider buying
Earlier this year, when Tupperware shares were in the $13s, two insiders -- the CEO and a director -- stepped up to the plate and purchased a combined 23,000 shares for a total investment of $308,780. That's not pocket change, even to well-off execs. Insider selling is prone to a multitude of interpretations, but there's only one reason insiders buy: They think the stock price is too low and destined to go higher.
3. Potential buyout
A few weeks ago, Barron'snamed (subscription required) Tupperware one of 35 companies that it saw as having sufficient cash flow to justify an acquisition at a higher price than where the stock was currently trading (Tupperware was at $14.61 when that article was published). I don't have anything substantial to add to Barron's assessment, but I can certainly see how Tupperware's free cash flow could be very attractive (and accretive) to an acquirer. And, Tupperware's enterprise value of $1.1 billion would be easily digestible to any number of companies.
In sum, Tupperware seems like a long-term success story that's caught in a temporary slump. A near-6% yield seems like a good way to wait out that slump until either Tupperware's business begins to fire on all cylinders or we see that buyout.
Hidden Gems take many forms. Sometimes they're undiscovered, sometimes they're stocks the Street forgot. The best of both offer the potential for outsized gains. If you like the thrill of the hunt, you might want to check out what Tom Gardner and his guest analysts (including Matt Richey in the forthcoming issue) are up to in his Motley Fool Hidden Gems.
Matt Richey (MattR@fool.com) is a senior analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.