Is Tupperware a Good Stock to Buy on Emerging Market Prospects Alone?

Tupperware is an interesting emerging market growth stock. It offers a curious mix of significant exposure to high growth emerging markets, a secular growth story with its direct distribution model and, a relatively recession resistant business model. On the downside, currency fluctuations play a major role in dictating profitability and their established markets appear to be low growth. I’ll try to outline these points in turn.

Emerging Markets Becoming More Important to Tupperware

Firstly, here is how segmental profits have developed over the years and note how the profit mix is shifting towards Asia/Pacific…

	Percentage Share of Segmental Profits
	2005	2006	2007	2008	2009	Rolling to Q3 2010
Europe	76.68%	52.83%	45.68%	45.56%	43.18%	40.20%
Asia Pacific	13.50%	20.79%	21.40%	23.81%	23.68%	25.54%
TW N Amer	0.33%	4.77%	8.77%	10.20%	11.48%	12.90%
Beauty N A	9.22%	8.01%	27.28%	22.27%	15.73%	14.34%
Beauty Int	0.26%	13.60%	-3.13%	-1.84%	5.94%	7.01%

It's worth noting that 'Europe' includes areas such as South Africa, Russia and Turkey, which have been high growth areas for them.  They are doing well in emerging markets but there appears to be a consolidated decline within established markets.

However, the situation is somewhat affected by executive issues at Beauty North America (BeautiControl) of which, they appear to have stabilized. The latter issue is somewhat embarrassing given that the CEO Rick Goings is a former US head of Avon Products.

Developed Markets Stabilizing and Restructuring in Place

Here are the sales numbers for the divisions on a five year basis...

	2005	2006	2007	2008	2009	Rolling to Q3 2010
Total Sales	1279	1743	1981	2161.8	2127	2271
Europe	602.5	615.9	688.2	769.6	749.6	788.6
Asia Pacific	204.5	239.7	292.4	336.1	385	440
TW N Am	253.6	255.5	289.8	303.3	292.3	316.3
Beauty N A	146.7	150	461.5	460.7	391.6	400.6
Beauty Int	72	482.6	249.5	292.1	309	325.9

The issues with Beauty North America are well expressed here, but they seem to have stablized to low growth. However as noted above, this division only contributes 14% of profits. Furthermore, if we look at segmental profits...

	2005	2006	2007	2008	2009	Rolling to Q3 2010
Europe	116.4	96.3	111	123.8	143.3	153.6
Asia Pacific	20.5	37.9	52	64.7	78.6	97.6
TW Nor A	0.5	8.7	21.3	27.7	38.1	49.3
Beauty N A	14	14.6	66.3	60.5	52.2	54.8
Beauty Int	0.4	24.8	-7.6	-5	19.7	26.8

...we see that the situation has been turned around. Nevertheless, the trend of slower growth in North America (Tupperware and Beauty) appears to be established.

A Recession Resistant Business Model?

 However, as noted in the initial paragraph, although this is slower growth it is relatively recession resistant. This is because when a recession bites, Tupperware will find it easier to recruit direct sales people to go out and sell their products on a part time basis. We can see that here...

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Active Sales Force by Segment
	2007	2008	2009	Q3 2010
Europe	97192	100,660	106,645	91,358
Asia Pacific	41361	47,370	62,419	72,726
TW Nor A	67204	75,927	86,832	88,548
Beauty N A	341,875	338,315	326,251	341,140
Beauty Int	239,802	240,758	232,137	234,029

The sales force in Europe and North America expanded dramatically during the recession. However, within Asia Pacific, an even more dramatic expansion took place.

Asia Pacific has another, more secular, profit driver. Not only is consumer discretionary picking up there, but Tupperware's direct distribution model works well in allowing women to generate part time income. A similar growth story is occurring with Avon Products, Revlon and Estee Lauder who are all, doing well within emerging markets.

Conclusions: Is Tupperware a Good Buy?

I confess to having a few concerns here. Tupperware North America appears to be set for low growth and I am also very concerned about a slowdown in developed Europe. I think increasing Sovereign Debt fears will reduce growth prospects for mainstream Europe in 2011. However, I note that this should result in an increased sales force, albeit with lower sales per person.

The emerging market growth story is compelling and, I believe, offers a cyclical (consumerisation) and secular (expansion of business model) growth story. Moreover, I expect emerging market profit contribution to be greater than that of North America by end 2011. The company already states that 60% of their sales are to emerging markets. In addition, this is including weak performance in Russia thanks to an accounting error and some one-off operational issues. Hopefully, these will be resolved.

Ultimately, I like prospects here and the way this stock will perform within a portfolio. It offers interesting and diversified profit drivers. Admittedly, it will not like strong US Dollar, but then again I am not a US resident.

 Analysts have it on an EPS of $3.62 and $4.17 for 2010 and 2011 respectively. At a share price of $47.68 this gives a PE ratio for Tupperware of 13.2x and 11.4x respectively. Furthermore, I have it on a current free cash flow yield of 5.7% which is good, considering they look set to grow earnings in the mid teens. I'll pick some up.

Source:

Tupperware Q3 Results

Interview with Rick Goings