Plastic Money

Shailendra is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Peter Lynch says that to find multi baggers and good stocks, start by looking around you for products and brands you have been using and are familiar with. So I started looking around and I found something I liked. Here are a few interesting points about this business -

  • This is a business which requires very less capex every year for maintenance and growth. Something that investing greats like Warren Buffett like very much. This means it throws off a high amount of free cash. Wow!!
  • For the past 5 years this company has grown its EPS from 1.54 to 3.53 at a CAGR of 20% – this is great considering it has almost 30-40% of its revenues coming from US and Europe which is facing recessionary conditions
  • 60% of the revenues come from the fast growing emerging markets where the revenues are growing at double digit rates
  • Now add to this – it is a very well recognized brand that is considered a super brand or power brand in many of the countries it operates in.
  • And it looks interesting based on quantitative data too– Debt free, cash rich, asset light business model, and great ROE numbers.

This is a familiar name in most of the kitchens, I am talking about Tupperware (NYSE: TUP).

Business Model 

Its business model offers many advantages which make it a win win situation for its sales agents, the company, and its shareholders.

Tupperware makes great products – food storage and beauty products - and they sell them to customers through their sales agents. They don’t have brick and mortar stores and outsource most of their manufacturing. This gives them an asset light operation and helps them earn high return on the capital invested. 

Other advantages the business model provides is that they don’t employ sales personnel. They hire sales agents who earn commission on selling the Tupperware products. Hence Tupperware doesn’t incur fixed costs of employees. The company doesn’t advertise so it saves on marketing and advertising costs. And they share a chunk of the savings with their agents – since these agents become their brand ambassadors.

The business model has proven itself to be a success after the bankrupcy of its onetime biggest competitor, Rubbermaid (now called Newell Rubbermaid (NYSE: NWL)). Rubbermaid sold  its products through traditional retail (mainly through Wal-Mart) and went bankrupt in the late 90s when it could not increase prices of its products and the cost of raw materials kept going up.

Revenues, Margins and ROE figures for past 5 years -

  2007 2008 2009 2010 2011
Revenues ($ mn)
1981
2162 2128 2300 2585
EBIT margin % 9.80% 11.27% 12.96% 14.32% 13.24%
ROE % 25.33% 32.39% 31.50% 31.61% 33.83%

Also, Tupperware is able to manage its cost of raw materials well as it has tie ups with major chemical companies. And the company has decent pricing power, as it is able to transfer any price hikes to their customers.

Capital Allocation 

One of the ways to test the management is to look at the way the management allocates the free cash Tupperware generates. 

The broad areas where the company can spend the money and how Tupperware stands on all counts are as follows–

1)      Use it to grow the business – It doesn’t require a lot of money to grow its business

2)      Use it for Mergers and Acquisitions – A red flag (as most M&As are unsuccessful)

3)      Give dividends to shareholders

4)      Buyback Shares

On counts 3 and 4 above, Tupperware is rewarding its shareholders. It pays out about 28% of its earnings as dividends and its increasing every year. Also, the company does share buybacks with the remaining free cash flows. Hence, with the combination of dividend and share buybacks, Tupperware is able to give its shareholders double digit returns.

Growth

So apart from the points mentioned above, a good growth ahead would be like cherry on top.

The long term growth rate has been 6-8% and it should be able to maintain that growth going forward as it earns more than 60% of its revenues from the emerging markets where it has been growing at double digits figures. And there is still a lot of room available for growth in these countries.   

Even in the developed markets, in these difficult conditions Tupperware has managed to grow at mid-single digits. So I believe that the company can quite easily maintain its growth rate for the next few years at least.

Competition

In the food storage space, in US it faces competition from Newell Rubbermaid with its Rubbermaid brand and in Asia it faces tough competition from a Korean company called Lock and Lock. Rubbermaid is majorly sold in US and does not pose a big threat to Tupperwares market position as they have totally different business models. 

But it’s a different story in Asian markets. There Tupperware faces huge competition from Lock and Lock. This brand has become the biggest brand in Korea with 63% market share of airtight plastic containers and it’s also the number 1 brand in China surpassing Tupperware. But Lock and Lock is selling through retail stores (similar to what Rubbermaid did) and only time will tell whether the business model makes a difference in this business.

Tupperware also has beauty products in its portfolio and mainly sells in Latin America. Cosmetics and Toiletries in general is a very tough business to be in with lots of competition and low margins, unlike its food storage business. It faces huge competition in the beauty segment in Brazil from Natura Cosmeticos and in other Latin American countries from Avon Products. Both Natura and Avon have direct selling model similar to Tupperware. Natura is the market leader in Brazil and Avon is the number 1 beauty seller in other LatAm countries such as Chile, Argentina and Colombia.

Risks

The most important perceived risk to the company is forex risk, but they have operations in so many countries that it provides a natural hedge to forex changes. The next major risk is the risk to its growth if the emerging markets slow down. Even if it slows down in the short run, the long term story and the scale of opportunity still remains intact.

Conclusion

At the CMP of $76, Tupperware is available at P/E of 15x (ttm), dividend yield of 3.25% (increasing every year), Free cash flow yield of more than 5% and ROIC of 20%. With a long term perspective, and considering the current economic situation, the valuation seems decent for a quality company with shareholder friendly management. 


PessimismRocks has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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