Tupperware: If Only It Can Survive (NYSE:TUP)

Summary

Tupperware is about as much of a "household name" as any, and over the past year its stock has fallen more sharply than a kitchen knife.
With a stock trading at 2x trailing free cash flow and bonds trading at 18% yield, the company is priced to fail by June 2021, when those bonds come due.
In this article, I look at some simple numbers and scenarios of the stock going to zero versus bouncing back to a sustainable cash multiple.
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The name of Tupperware Brands Corporation (NYSE:TUP) is one of many I have known since I was very young, and probably thought in the back of my mind would continue to be around for many more decades. That's not because I actually own any Tupperware brand products, nor have I ever been to a Tupperware party, but like the names Walkman, or Band-Aid, or escalator, it is a name that has become so ubiquitous many of us even call competing products by that name. I have never owned TUP stock, but when the name popped up on one of my screens after its recent fall, I thought it was worth at least a quick look. At first, TUP looks like a debt distress situation similar to Toys R Us, but the bond market still seems to be giving TUP a decent chance of making it, and if it does, TUP's shares are unlikely to keep trading at 2x free cash flow.

Tupperware's Historic Numbers

TUP shares have fallen by 80% over the past four months, 90% over the past year, and by about 97% from its high in early 2014. This makes it one of the latest examples of a stock that falls 90% by first falling 80%, and then falling another 50%, and of the dangers of trying to "buy on dips". Below is what I found to be the more informative chart of TUP's market cap over the past 20 year, compared with its free cash flows and debt level. The high level numbers that seem to stick out are:

TUP has fallen from trading at well over 20x cash flow, to now trading at less than 2x free cash flow, and
That mostly seems to be doing to a rising debt level, that is now over 12x that annual free cash flow and over 6x the current market cap

Zooming in on the above chart, without the market cap, but adding in net income and book value, we can see the significance of that rising debt level. There seems to have been dramatic increases in TUP's debt around 2006 and again between 2011-2014, but significantly higher cash earnings around the time TUP shares peaked in 2014 seemed to make all the difference in being able to cover that debt, which was already near current levels. Around 2017-2018 it seems they took a major non-cash write-down that pushed its book value down to the record low levels of almost negative 2x market cap reported in the most recent quarter.

The mistake seems clear in hindsight when we take a quick look at how they timed returning money to shareholders and bond holders. The debt taken on around 2006 seems to been followed by a focus to pay it back, while cash flows following the 2011-2014 debt issuance seem to have instead been used to support a significant dividend increase and buybacks almost as large as the debt issuance. The buybacks seem to have been somewhat foolish in hindsight given that they took place at the peak of TUP's stock price. The dividend was cut from $0.68 to $0.27 per quarter during calendar year 2019, and no dividend has been declared since August 2019, a cut TUP shareholders should probably hope came not too late.

About Tupperware's Debt

At this point, it may be most useful to look at where TUP's debt is trading to see bond traders' view on how likely it is TUP will declare bankruptcy. TUP's main outstanding debt is a roughly $600,000,000 bond due in June 2021, about 15 months from now. Over the past day, reported trading prices on this bond collapsed from just above 98 to around 86 cents on the dollar, a yield to maturity of around 17.6%. Back of the envelope, if we assume a default/bankruptcy/restructuring situation would leave bondholders with a claim worth around 50 cents on the dollar, this latest price implies a 30% chance of this default scenario versus a 70% change this bond gets repaid in full. Note that if we assume a higher recovery rate for bondholders, that implies a higher probability of default and vice versa. Given that TUP's September 2019 10-Q reported its major recoverable assets as roughly $250 million each in 1.) cash and receivables, 2.) inventory, and 3.) plant and equipment, I would estimate an implied recovery rate below 50%, meaning bondholders seem to be pricing in a less than 30% probability of default.

Source: FINRA TRACE / Morningstar

Also yesterday, Moody's downgraded Tupperware debt to the junk rating of B1.

What can be done about the debt?

Looking only at TUP's financials, and not its business or market reputation, there seems to be no question that TUP will have to refinance / extend the 2021 bond and other $300 million+ of debt, and only a question of whether it will succeed in doing so and on what terms. The good news seems to be that its top-line revenues, while still 30% below their 2014 peak, are still about 2x as much as its overall debt level. Even if Tupperware manages to keep its revenue from declining further and sustain a free cash flow of around $60-75 million/year, that would still require 7-10 years just to pay down the principal of the bond that was supposed to be due next year. That does not leave much room for reinvestment into new products or marketing updates that will help defend those revenues from Amazon or other competitors in China and India (two important markets), and definitely no return to paying dividends before that debt ratio comes back down. Like most other businesses, it ultimately comes down to maintaining a solid demand from customers, and that is what the next few years will test.

Silver linings

While trying to look for a good upside case for TUP, I was pleased to see that at least one of the 8 SeekingAlpha articles written on TUP over the past year was bullish. Back of the envelope again, I might estimate from the above charts a scenario where free cash flows fall significantly to around $30 million/year, but after a few years of significant progress paying down its debt, the free cash flow multiple recovers to 10-15x. That would imply a $300-450 million market cap, a double or triple from current levels. I should repeat this is highly dependent on TUP's success in extending and paying down its debt. The scenario is not too different from that of a highly levered homeowner buying with 3% down, and doing very well if only by being able to make payments long enough to build home equity up to 6-10%.

The other silver lining in TUP's outlook is insider buying. In the past 3 months, there have been 11 open market insider buys of 221,513 shares versus 2 sells totaling 5,551 shares, and this ratio seems even more skewed towards insider buying than the previous 9 months. This may not mean much, especially given the 2014 buyback mentioned earlier, but seems like at least a small vote of confidence.

Conclusion

We currently hold no position in TUP, and have no plans to initiate any. I view buying TUP shares or bonds, even at these levels, an almost pure debt on the debt plan I described, which insiders will be far better informed on than I will ever be. Between the stocks and the bonds, I see more upside in the stock, simply because, as mentioned, if TUP can last a few years, it can double or triple in ways the bonds cannot. The way I size positions that can go to zero as easily as this though, is to usually keep them no more than 1-2% of a portfolio. If you believe TUP is far more likely to not make it, on the other hand, you might find it safer to short the bonds (if you can) than the stock.

If you appreciated my big picture, long-term viewpoint in this article, you will see much more in a free trial to my Marketplace service, Long Run Income, where I focus on ideas work across decades and borders.

This article was written by

Tariq Dennison

5.75K Followers

Tariq Dennison, runs an RIA focused on international clients and portfolios, applying his on-the-ground experience as an expat investing in diverse foreign markets. Tariq is the author of the book "Invest Outside the Box" and soon-to-be-released "10 Ways To Invest." He lives in Switzerland, and has worked in Finland, Canada, the UK, Hong Kong, and Singapore.

Tariq is the leader of the investing group The Expat Portfolio where he helps members invest internationally with greater clarity and confidence. Features of the service include: Frequent, short, and focused analysis, access to his watchlist and dashboard, guides to specific foreign markets, and direct access to Tariq and his community in chat for discussion and questions. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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