Ever since Earl Tupper introduced the Tupperware (TUP) brand to consumers back in 1946, the products bearing his name revolutionized how we store, prepare and serve food. Who would have thought a design patterned after the inverted rim of a can of paint could go on to be a staple in homes and kitchens world wide?
Yet, the company has innovated beyond the kitchen and home to include cosmetic and personal care products making TUP a truly global consumer products business. Tupperware stock has also been on a tear in 2011 trouncing the S&P YTD.
Does TUP have more upside and what do the financials tell us about its prospects and current financial situation? For this we will examine the previous seven quarters through Dec. 25, 2010.
Cash Flow: Operating cash-flow as defined in our dual cash-flow model has exhibited a generally strengthening trend throughout most of the review period. We do note a slight decline in the recent Q4 dual cash-flow ratio, likely the result of rising accounts payable during that period. We also point out that the 24% quarterly growth in payables (Q3-Q4) came on a 25% rise in sales.
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Management appears to be focused on improving the quality of asset returns; this is evident in Q4 collection cycles. Q4 days-sales-outstanding improved to 25.3 days as compared to 30.7 in the prior period and versus the average 29 days for all seven quarters.
Inventory changes at year-end dropped to 42.6% of sales, similar to Q4 2009 and well below the average 50.7% of sales for all periods reviewed.
As a percentage of sales, operating cash flow (OCF) and balance sheet cash flow (BSCF) each declined modestly in the latest period. Because OCF and BSCF levels declined proportionately, the impact on earnings quality is negligible. However, further declines in OCF and/or a spike in BSCF levels (as % of sales) going forward, would be a concern.
The spread between OCF and BSCF remains wide and although recent dual cash trend signal is flashing "recent bearish," the overall DCF trend remains "confirmed bullish." Should near-term (recent) signals remain bearish for the next several quarters, then concerns to TUP’s quality of cash flow and their component contribution to earnings would become more pronounced.
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Again, with respect to the balance sheet, the decline in TUP’s Q4 dual cash ratio and OCF/BSCF levels are not worrisome given the overall quality of income producing assets. Similarly, the bump in payables is not unusual, but investors will want to keep an eye on payables going forward.
Accruals: Another clue that the slight dip in the dual cash ratio seen in Q4 is not problematic is validated by a bullish Q4 accrual reading of -4.68%. A negative accrual ratio indicates that management is not dependent on non-cash contributions to build the earnings report.
Also, it does not hurt that Moody’s just raised TUP’s ratings to investment grade, highlighting the company’s stable operating performance and significant balance sheet deleveraging.
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Revenue Metrics and Capital Productivity: Income producing assets (per $ of sales) also showed marked improvement in each category we follow. Offsetting these improvements were modest declines in Cost-of-Sales and the aforementioned Accounts Payable. Significant improvement can be seen in S,G,&A expense in the latest period.
Raw materials used to manufacture TUP’s plastic products, particularly petroleum and natural gas based resins so far have been plentiful and low priced. A significant increase in these raw material costs would invariably have a material impact on CoGS and margins going forward.
Summary: Operations in Japan account for an estimated $50 - $100 million in revenues annually, about 3% of total sales. Approximately 20,000 people sell Tupperware products in Japan as independent contractors.
TUP had lost two distributorships in northern Japan prior to the earthquake and the company is still tallying the number of salespeople unaccounted for in the region. While this will undoubtedly slow the company’s turnaround efforts in Japan, we do not expect any significant hit to earnings as a result.
The company’s other international markets and North America sales are expected to see mid single digit growth in 2011, but it should be noted that earnings have beaten consensus estimates in seven of the previous eight quarters.
TUP in our view has a strong balance sheet. The current 2.1% dividend is well covered by earnings yield and a manageable 30% payout ratio. Debt-to-Assets have been declining and the company benefits from a global presence and a diversified product portfolio.
Earnings Quality: A-
Estimated Fair Value: $51.17
Based on our Fair Value estimate TUP is currently OVERVALUED by +13.56%.
Tupperware is a quality name and suitable for almost any portfolio. We rate the stock a HOLD based on current valuation and would be buyers of TUP shares on any meaningful pullback in price. Partial positions can be considered at $54 or under; full positions up to $52.
You can view our complete financial statement analysis for TUP here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
