Reynolds Consumer Products: Attractively Valued And Stable Home Goods Player
Summary
- Reynolds Consumer Products is a manufacturer of home goods. The company manufactures and sells kitchen goods, trash and storage products, and dinnerware.
- The company has a very long operating history, with common items found in almost each U.S. household, and has strategic partnerships with some of the largest U.S. retailers.
- I don't expect the stock will experience a very high price appreciation. An advantage is that the low beta indicates a low price risk.
- Furthermore, the stock does offer a nice 3.17% forward dividend yield.
- As the forward P/E ratio is fairly attractive, I believe that this stock is a buying opportunity for investors seeking a stock with fairly predictable and stable total annual returns.
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Investment Thesis
I think Reynolds Consumer Products (NASDAQ:REYN) is a good purchasing opportunity for investors looking for a firm with generally stable and predictable total yearly returns. I believe that the forward P/E ratio is currently favorable, its products are common items found in almost each household, the stock has a low beta and a nice forward dividend yield.
Introducing Reynolds Consumer Products
Reynolds Consumer Products is a manufacturer of home goods. The company manufactures and sells kitchen goods, trash and storage products, and dinnerware. Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware, and Presto Products are its four reportable segments. Revenue is generated by the corporation in the United States.
Industry Outlook
As the industries that Reynolds Consumer Products serves are mature with no significant radical innovations or other catalysts, its future growth level is likely to be around 2.5%. This is the historical growth rate that can be seen in most consumer product industries.
Competition
The domestic consumer goods market in the United States is mature and highly competitive. Its competitors include consumer goods firms, including major and well-established global corporations and smaller regional and local businesses.
Among these rivals are The Clorox Company (CLX), S.C. Poly-America, Handi-Foil Corporation, Republic Plastics, Trinidad Benham Corporation, and Inteplast Group are among the companies.
The majority of its items compete with other extensively publicized brands and store brand products within each product category.
Price, quality, and brand awareness are likely to be factors influencing competition in its categories.
Company | Business Description | Market Cap | Last Year's Revenue Growth |
Reynolds Consumer Products (REYN) | Reynolds Consumer Products is a manufacturer of home goods. | 6.10B | 8.98% |
The Clorox (CLX) | Clorox, which has been around for over a century, today has a presence in a wide range of consumer product categories, including cleaning supplies, laundry care, trash bags, cat litter, charcoal, food dressings, water-filtration products, and natural personal-care items. The company's portfolio also includes Liquid-Plumr, Pine-Sol, S.O.S, Tilex, Kingsford, Fresh Step, Glad, Hidden Valley, KC Masterpiece, Brita, and Burt's Bees. | 17.75B | 9.22% |
Source: Morningstar and Seeking Alpha
Competitive Position
According to Reynolds Consumer Products' most recent annual report, its brand- and store-brand goods are found in 96% of American households, and the company claims to have the #1 or #2 market share position in the bulk of the product categories in which it competes. They assert that they have increased their market share by making investments in their product categories and continually producing novel items that cater to the changing demands and tastes of contemporary consumers.
Reynolds Consumer Products' annual statement states that:
- The company occupies the number one market position in the consumer foil market in the United States in terms of sales and volume
- For almost 70 years, the top trusted brand in the consumer foil industry.
- Has the largest branded market share in the outdoor trash bag and slider bag sectors in the United States and the second largest branded market share in the tall kitchen garbage bag category.
- Its Hefty branded party cups have the highest market share in America.
Furthermore, they are partnered with some of the largest renowned retail companies. Roughly 30% and 15% of its revenue come from Walmart (WMT) and Sam’s Club, respectively.
Overall, Reynolds Consumer Products has a very long operating history, seems to have a trusted brand, and is a leader in different categories, making them a desired strategic partner for larger retailers. I believe that such characteristics are essential competitive strengths in the industries in which they operate.
Valuation and Financial Performance
Basic statistics comparison:
index | Forward P/E | Gross Margin | Free Cash Flow Margin | 3Y sales growth | 3Y EPS growth | Debt / Equity |
Reynolds Consumer Products | 18.48 | 21.59% | 4.77% | 4% | 12% | 1.22 |
The Clorox | 27.62 | 35.80% | 7.92% | 6% | -2% | 8.11 |
Source: Seeking Alpha
The revenue growth of Reynolds Consumer Products was mainly driven by the increase of revenue of at-home products in 2020, which I assume is related to the COVID pandemic. In 2021, there was a large increase in sales, mainly due to a combination of price measures implemented as a result from rising material costs which resulted in higher pricing. The company underwent a very nice earnings growth in the recent years. Going forward, due to the nature of the company, I’d say it’s more realistic to grow its revenue and earnings at a 2.5 to 3.5 percent annual rate.
Although Reynolds Consumer Products has lower gross and free cash flow margins than Clorox, its EPS growth is higher, and has a much more attractive capital structure.
Reynolds Consumer Products is much cheaper valued than Clorox, and just a little bit more expensive than the S&P 500 median current P/E ratio of 15.
Furthermore, Reynolds Consumer Products has a very low beta of 0.28.
Q2 2022
On the 9th of August, the company will report its earnings for the second quarter of FY 2022.
A potential headwind for the business is the impact of inflation on the company. Due to the rise in material costs, the gross margin of the company decreased from 29.82% in 2020 to 21.60% in the last 4 quarters. Material costs have decreased a little bit in the last months. However, according to the latest annual report, Reynolds Consumer Products maintains a FIFO inventory method (a technique of inventory valuation based on the premise that first-produced are sold first). This could potentially mean the decrease of material prices in the last months isn't priced in yet in the new gross margin. The CEO states in the latest quarterly earnings call that the inflation effect has been taken into account in the 2022 estimates. As inflation effects are most likely taken into account for the most part, I suspect that a decrease in gross margin won't influence the stock all too much. Overall, I expect the earnings numbers to be relatively similar to the latest quarters.
Final Take
Reynolds Consumer Products' stock price didn't move much in the last 1.5 years. As it's a stock in a mature market without, in my opinion, huge catalysts, I don't expect the stock price to skyrocket.
The company has a very long operating history, with common items found in almost each U.S. household, and has strategic partnerships with some of the largest U.S. retailers. Furthermore, the stock is relatively stable as it increased by 2% in the last 12 months compared to the 6% decrease for the S&P 500. The low stock beta indicates a very low price risk. While I don't expect an over-the-top price appreciation, the stock does offer a nice 3.17% forward dividend yield. As the forward P/E ratio is fairly attractive, I believe that this stock is a buying opportunity for investors seeking a stock with fairly predictable, stable total returns.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.