Tupperware Brands (TUP) is a current selection of GuruFocus’ Undervalued Predictable Companies screen. This screen looks for undervalued companies that are highly ranked based on GuruFocus’ Predictability Rank (read more: What is Predictability Rank). We have found strong correlations between the predictability of businesses and the long-term return of stocks, as shown in the table below.
Companies with a higher Predictability Rank have generally experienced higher returns with lower frequencies of capital loss. Ranked 4.5/5 stars, TUP has shown a consistent and sustained ability to drive higher operating income and free-cash-flow. Notably, the company was able to drive higher operating profits throughout the 2008-2009 period.
Recently however, that shares have experience some relative weakness. Despite a small rebound, the shares have still lagged the overall market by ~20% over the past 12 months.
This January, the company said it continues to face “challenging external forces” and offered an outlook that fell below expectations. In the fourth quarter, established market sales (34% of total sales) fell 1%. Tupperware North America’s segment sales fell 2% in local currency while a slide in Mexico sales offset growth in the U.S. and Canada.
With the past 12 months financial performance underwhelming in comparison with a decades long history of impressive results, could this signal a buying opportunity for a traditionally strong business?
The business:
A very simple business to understand, the core of the TUP’s product line consists of preparation, storage, and serving solutions for the kitchen and home. TUP also has established lines of cookware, knives, microwave products, textiles, water-related items and an array of products for on-the-go consumers. Products are primarily sold directly to private distributors throughout the world. Where distributorships are granted, they have the right to market the company's products and to utilize Tupperware Brands' trademarks. Tupperware relies on a largely female sales force of 2.9 million to sell its brightly colored food-storage containers to friends and family through house parties.
Long-term growth drivers still intact
Tupperware's management still expects to see significant profit growth in the years after 2015. Increasing urbanization across the world and household formation from a growing number of millennials and middle-class families should drive future business opportunities. They expect this to be magnified by further penetration in emerging markets within South America, South Africa and Asia.
Importantly, their CFO has commented that their penetration rates in many emerging markets is still quite low. This has helped drive local-currency growth rates >10% for most of the markets, with yoy growth rates as high as 44% in some cases (Argentina). Management expects to be able to maintain a 10%+ overall emerging market growth rate going forward. Already a majority of sales, this long-term opportunity should help offset weaknesses in their more developed regions.
In fact, the market dynamics in emerging markets can actually be more attractive than in developed markets. Surprisingly, this includes a lower price-sensitivity for emerging market consumers. CEO Rick Goings said he expects at least 80% of the company's revenue to come from emerging markets by 2019, up from about 60% in the fourth quarter. As the CEO explains in a recent WSJ interview:
Mr. Goings: Tupperware's products are higher-tech, and great value for the money. Twenty years ago, food service was most of our business. Now it's less. We sell a product called a micro steamer that's about $150. Great seller in emerging markets. The U.S. tends to be much more price-sensitive.
WSJ: Why is the U.S. more price sensitive than emerging markets?
Mr. Goings: It's very much a symbol of prestige in emerging markets. We've moved Tupperware from being about food storage to a powerful brand. She may not be able to go out to get a house or car, but (buying Tupperware) is the first thing she can do to show that she's moving forward in life.
WSJ: How important are emerging markets to Tupperware?
Mr. Goings: We really moved away from being an American company 20 years ago. The U.S. is less than 10% of our business. We happen to have our headquarters in the U.S., but we're a global company. We talk about where to put focus and resources, and 87% of the world's population lives in emerging markets. If you look at one area that's going to be strong, it's going to be Asia, including Indonesia and India.
Valuation:
While share performance has been weak of late, investors are still anticipating the last 12 months of weakness to be temporary. Still, using GuruFocus’ Reverse DCF Tool, we can estimate that investors are currently pricing in long-term growth rates slightly below the company’s historical rate.
Additionally, the recent weakness has helped push the dividend yield to levels not seen since 2009. This is off six years of consecutive dividend increases from a company that hasn’t cut the dividend for over 20 years.
While the company is a consistent FCF generator, it’s currently trading at an attractive ~6% FCF yield, trading as low as ~7% in January. Adding in the current dividend yield of 3.8%, total shareholder returns from the business currently stands at close to 10%.
Recent guru purchase activity
Encouragingly, TUP’s recent share weakness has attracted several Guru purchases/adds, with almost a million shares being bought last quarter by the likes of Joel Greenblatt (Trades, Portfolio) and John Hussman (Trades, Portfolio).
Conclusion:
While the shares have rebounded recently, from a total shareholder return standpoint (FCF yield + dividend yield), TUP remains attractive as a potential investment. Ranking near the top of GuruFocus’ Predictability Rankings, this looks to be a rare time to invest in a strong global brand at a reasonable price.
See GuruFocus’ Undervalued Predictable Companies screen for more ideas like this one.
