Tuesday, December 21, 2010

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...

<><><><><><><><><><><><>
Active Sales Force by Segment
200720082009       Q3 2010
Europe97192100,660106,64591,358
Asia Pacific4136147,37062,41972,726
TW Nor A6720475,92786,83288,548
Beauty N A341,875338,315326,251341,140
Beauty Int239,802240,758232,137234,029


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.


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