Emerging Markets Play or Value Trap?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With all the conversation about growth to be had internationally, everyone is also realizing that currency fluctuations can make this growth disappear in a heartbeat. Many international companies have cited currency fluctuations as a primary reason their results were not better in this most recent quarter. Tupperware Brands (NYSE: TUP) was no exception to this rule, the difference is Tupperware has a huge percentage of its sales in emerging markets where organic growth was impressive. The challenge for investors was deciphering what the company said versus their actual results. Let's take a look at the company's most recent earnings report, to see if we can figure out if this is a good play on international growth or if investors could get burned.
Tupperware actually operates two different businesses, whereas many people only know the name from the old school sealable containers. While it's true the company's container division is a large part of their business, the company also operates a growing cosmetics business that has taken off in particular in the international market. The company has taken a page out of competitor Avon Products (NYSE: AVP) playbook by hiring individual distributors to hold parties and sell these cosmetics on a door-to-door basis. The company faces challenges from better cosmetic brands like Estée Lauder (NYSE: EL), and in their storage business they face well-known companies like Newell-Rubbermaid (NYSE: NWL). I've written in the past, that it looks like Tupperware represented a good value given its dividend and potential growth, but the companies last earnings report called into question this assumption.
At the end of July, Tupperware said organic sales were up 5%, and diluted EPS increased 22% in local currency. The company said it estimates 84.5% of its revenue comes from emerging market opportunities where organic sales were up 14%. Considering the company saw a 6% organic sales decline in established markets, this statement is significant. The problem is, on a geographic basis the companies reported results don't seem to quite line up with what Tupperware management is claiming. The company's established Tupperware results in North America showed a 2% organic decrease in sales, and the companies European segment showed flat organic sales. Equally troubling was the company's beauty results in North America showed sales down 17%, and organic sales decreased 8%.
Given these results, this only leaves Asia-Pacific and South America as bastions of growth for the company. Asia-Pacific sales were up 6%, but organically they increased 12 percent. In South America sales were up 19%, and organic sales jumped 36%. Considering that out of the five major regions only two show organic growth, you have to wonder where the company came up with this 84.5% emerging market opportunities percentage that was given? What was even more troubling was the company's financial statements, which showed a few red flags that investors should be aware of.
Tupperware's operating cash flow does not reflect the sales and EPS growth that the company reported. On a year-over-year basis, operating cash flow was basically flat. Free cash flow in the last six months came in at just $17 million. This was a major issue, as the company paid over $37 million in dividends during this timeframe. With a 220% free cash flow payout ratio, Tupperware reversed one of the arguments for investing in their stock. With a dividend yield north of 2.5% this gives investors current income, while they wait for Tupperware's earnings growth. The problem is, with this high of a free cash flow payout ratio, investors may begin to question the stability of this dividend. This is a similar concern that has come up recently at Avon. I've said in the past, though the companies 5.8% yield looks attractive, investors should not be fooled as this dividend is at risk. With the dividend in question, Tupperware becomes more of a play on the company's growth in earnings. The question for investors is, should they bet on these earnings or not?
When considering Tupperware, investors should look at the competition to determine if better opportunities are available. We have already ruled out Avon and their questionable dividend as a non-contender. Keeping with the beauty products theme, what about Estée Lauder? The biggest challenge that I see for this company is their current stock price. With the shares trading at over 23 times forward estimates, and only expecting growth of about 14%, it seems investors are expecting something that won't happen. In addition, Estée Lauder's dividend yield at less than 1%, doesn't give income seeking investors much to write home about.
Looking at their storage competitor Newell-Rubbermaid, this company offers a slightly slower growth rate than Tupperware, and a slightly lower yield at about 2.1%. However, the company's cash flow is significant, and at worst their payout ratio has stayed below 50% for the last several quarters. With Newell-Rubbermaid trading at about 11 times forward estimates, this could be an attractive substitution for Tupperware. That being said, Tupperware management has historically led the company to much better cash flow results. In the last few years, their payout ratio has averaged less than 30%.
The main thing investors need to watch for is another successful holiday selling season, which is traditionally the company's strongest quarter. The shares sell for about 12 times forward earnings, and analysts expect 12% earnings growth. If the company has a good second half of the year, Tupperware still represents a decent value. For investors in Tupperware this is a beautiful combination that may help them seal up profits.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Tupperware Brands and has the following options: short OCT 2012 $55.00 puts on Tupperware Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.