MisterValuation Stock of the Week: Tupperware (TUP)
My MisterValuation Stock of the Week is Tupperware Brands. Before I go on, for disclosure, I am currently long the stock and posted an article on Seeking Alpha on April 4, 2014 titled “Is Tupperware Brands the Perfect Dividend Growth Stocks for Retirement Portfolios.”
At the time I published the article, Tupperware was fairly valued based on actual current earnings, and also appeared fairly valued based on future forecast earnings. Unfortunately, earnings growth for 2014 and 2015 did not pan out as forecast. Instead, earnings have fallen in both years from the high set in 2014 and Tupperware’s stock price followed in lockstep with lower earnings.
On the other hand, I believe that stock price has ultimately fallen farther than lower earnings justified. Moreover, although Tupperware’s earnings were lower, the company remained highly profitable and cash flows continued to support their dividend. Therefore, Tupperware has maintained its dividend rate in 2014 and 2015, and both were materially higher than what they paid in 2013.
My continuing analysis has concluded that there were two primary drivers behind Tupperware’s slower earnings levels that were, to a great extent, beyond management’s control. These primary deterrents to grow were worldwide terrorism and foreign exchange headwinds. Here is what Rick Goings, chairman and CEO had to say on these subjects during their 4th quarter 2015 earnings call:
“I do want to point out that the foreign exchange impact since 2012, it’s been unprecedented in my business career [indiscernible] was really negative $2.57 on earnings per share in the last four years when in the five years that preceded 2012 it was only $0.01 negative.
Now I don’t have to tell anybody here that there is a lot of change going on in the world right now and much of it is not good. You can go through the laundry list of not only this new form of terrorism, but evaluations, heightened political uncertainty. But the reality is our business model is really made to navigate through this.”
Moreover, I do not believe these are excuses for Tupperware’s weak results in recent years. Instead, I believe these are facts that the company had to deal with. But most importantly, the real question is – are these issues temporary or permanent? And more important, does management have a plan to deal with them in order to improve their business going forward? Once again, here is what CEO, Rick Goings had to offer regarding these two important questions:
“Now before I get into our individual units, it is important to say that in spite of all these external forces we continue to have a lot of confidence in the future of our business for a number of solid reasons. We’ve got a business model that produces some dynamic levers at our disposal. We don’t have to sit there and wait till things generally get better.
The strength of our very seasoned management team, we tend to bring people into our company in their late 20s or early 30s and then move them through different areas and as a result we don’t really need to recruit many people from the outside and our retention levels are very, very high with people who even early 40s have sometimes two decades of experience with our company.
We’ve got a dedicated sales force out there and many of them never forget we’re a multi-local business and she often is the sole source of income particularly in the developing markets of the world to support her family. And another important point, we’ve been through this before.
If you follow Tupperware Brands performance in the years after the financial meltdown in 2008 you’ll note that we recorded a string of years of our best performance and also in 2013 we preemptively pulled together a dynamic young team to really work on how do we get our business up to the next level to make it more effective and at the same time to extend our reach.
So we’re not in a mode like many companies are, oh my goodness, what do we do, we’re in the mode of actually refining these concepts and actually executing on them and we’ll talk about that in a bit.”
Additionally, for those of you interested in learning more about their plans, I suggest you take the time to view and listen to their Vision 20/20 Strategic Initiatives Update.
I also suggest taking a look at the slide presentation they presented with their recent 4th quarter 2015 earnings call.
Return On Invested Capital: An Important Metric
In recent years, Tupperware has generated attractive returns on invested capital above 20%. Although return on invested capital did fall slightly in 2014 at 2015, it remained about 20% in both years. This is important, because I believe that evaluating a company’s return on invested capital provides important insight into the company’s profit potential. The following FUN Graph reports Tupperware’s return on invested capital since 1997.
The following corresponding earnings only F.A.S.T. Graphs™ presented in logarithmic form provides an interesting insight into the relationship between return on invested capital and profits. Note the similarity between Tupperware’s return on invested capital and their operating earnings over time.
Considering what management had to say above, I am also reasonably optimistic regarding Tupperware’s future profit potential based on the company’s improved return on invested capital in the 4th Quarter of 2015. This is a metric that I will be following very closely as time goes on.
The Bottom Line
I’m optimistic that the worst may be behind Tupperware Brands. I do believe the company operates under a proven business model, and I believe longer-term the international opportunities are large. Consequently, investing in Tupperware today looks like it is at a very attractive valuation, and offers a high current dividend yield of approximately 5%. The stock is up strongly today as I write this article which has pushed Tupperware’s current yield slightly below 5%. The analyze-out-loud video associated with this article will take a deeper look into my views on Tupperware long-term.