Investment Thesis

An investment in Tupperware Brands Corporation (TUP) is not recommended until the debt situation has been addressed. At present, it is just a vehicle for speculation because of high leverage, falling sales, and negative investor sentiment. Almost $600 million of debt is due to be repaid mid-2021.

The post WWI, 1920s (somewhat like the present) was an age of moral bankruptcy, cynicism, and vanishing illusions. The character Mike Campbell in the Ernest Hemingway, 1926 classic novel “The Sun Also Rises” was asked about his money troubles and responded with a vivid description embracing self-contradiction:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

“What brought it on?”

“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

Tupperware’s stock price has collapsed over the last 2 years after reaching its apogee in 2014.

Source: Gurufocus.com

Tupperware is a direct marketer (a.k.a. a multilevel marketer or “relationship seller”) of household and cosmetic products. Two-thirds of its sales come from emerging markets. The last few years have been terrible for the stock as it’s been buffeted by the perfect storm of e-commerce and US dollar appreciation. The CEO’s office appears to have a revolving door. The company is on to its third CEO in 2 years as it searches for the right strategy to stem the decline.

Trade weighted US Dollar Index. Source: Fred.

Elephant in the room: Debt

Tupperware is very leveraged and carries long-term debt of over 600 million and another $325 million of revolver debt.

Source: Author with data from Gurufocus.com

Tupperware Brands Annual Data
Dec09 Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 Dec17 Dec18
Debt-to-EBITDA 1.34 1.13 1.55 1.73 1.88 2.04 2.08 1.75 2.53 2.33

Source: Gurufocus.com

In June 2011, the Company sold $400 million of 4.75% Senior Notes due June 1, 2021, to a banking syndicate led by JPMorgan. In March 2013, the Company sold an additional $200 million senior notes to the banking syndicate.

Source: 8-Q

Unfortunately, the company has wasted a lot of capital in prior years by buying back stock at inflated prices (perhaps thinking the situation was temporary) instead of paying back debt. This miscalculation has cost it dearly.

Source: Author with data from Gurufocus.com

Hippo in the room: Declining Sales

The following slide is from last year’s (2018) annual report. It reports revenue declines pretty much across the board.

Source: Company presentation

This year is no better. Revenue per share declined over 12% from last year in the latest quarter.

Rhino in the room: Multilevel Marketing

The business model of multilevel marketing is currently perceived to be a dodgy concept. Huge fortunes by promoters such as Avon, Herbalife, and Amway have been built on this concept, but most sellers at the bottom of the MLM pyramid fail. This business model is out of favour among investors. Robert FitzPatrick in his excellent article Wall Street: Still Confused About ‘Multilevel Marketing’ But Starting To Hedge Bets states that:

Public sentiment and popular media treatment of MLM are increasingly mocking, critical and condemning. This erodes investor confidence in MLM stocks.

The following has happened to most of us if you have been lived long enough.

A long time friend that you lost touch with for the last 10 years gives you a call and asks to meet up. After meeting up and breaking the ice, he/she then introduces a new revolutionary product and how you stand to get rich by selling it. Throw in jargons like passive income and downlines, you suddenly realise you’re beginning to be sucked into the dream they are selling.

MLM) Work?” data-width=”640″ data-height=”341″ data-og-image-twitter_small_card=”true” data-og-image-twitter_large_card=”true” data-og-image-twitter_image_post=”true” data-og-image-msn=”true” data-og-image-facebook=”true” data-og-image-google_news=”true” data-og-image-google_plus=”true” data-og-image-linkdin=”true”/>

It’s fair to say that people in the top and middle layer of the MLM organization can make good dough, but most people in the bottom layers don’t. While one can’t get rich toiling in Amazon’s (NASDAQ:AMZN) warehouse or flipping burgers at MCD either, but usually you don’t buy your job and then lose your “investment” either.

However, not all is bad because the company is free cash positive (by $74 million (T12M)) with a market cap of only <$400 million. The company has recently eliminated its dividend and is releasing excess working capital. Hopefully, the company's leadership will use that cash to de-leverage going forward before they run out of time.

Source: Author with data from Gurufocus.com

The Big Question?

The big question, of course, is, will TUP be able to refinance its senior notes due in mid-2021. As J. Paul Getty said:

If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.

We cannot lose sight of the fact that, the shareholders claim, i.e., the equity is the sliver between assets and liabilities. In this case, the company has negative equity. Basically, the bankers own the entire ball of wax.

Source: Simplywall.st

If the company defaults in the slightest, the banker can wipe out the shareholders. So, the answer to the big question is, yes, the company will survive, but shareholders may not.

Discussion & Opinion

Tupperware looks cheap on a P/E basis. Return on Invested Capital is still quite high >20%.

Source: Gurufocus.com

But frankly, I can’t see past the three magnificent beasts in the room. Given the amount of debt on the balance sheet and the negative equity, falling sales and the MLM business model, makes the company, in my opinion, uninvestable. The stock is purely a vehicle for speculation. With no dividends, the stock is a call option on survival. The company is valuable as a going concern as I think even in a zero-growth scenario (leaving debt default risk aside), it’s probably worth about $20 a share. (see below).

Valuation: Using Earnings Power Method assuming company is able to refinance.

If the company fails to refinance (and/or defaults on its debt), the bankers will simply turn around and sell the recapitalized equity to someone else at a profit. Another scenario could be that someone with deep pockets, like Carl Icahn, who already controls Newell Brands or an emerging market buyer like Natura which bought Avon can come along a buy the equity. After all, the company has an iconic brand and is cash flow positive. This is a bit of a long shot and the upside is not compelling enough for me. I plan to watch from the sidelines but may speculate opportunistically.

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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2020-01-15