They see three key reasons to buy TUP shares today.
1. Potential for 180% increase in dividend in 2012 – They expect net debt/capital to drop below 0.2X over the course of 2011. Tupperware is unlikely to use its healthy cashflows for acquisitions or aggressive buybacks. Instead, the firm forecasts a sizeable increase in the dividend in 2012 towards $2.80 per share.
2. Emerging markets drive 19% EPS growth in FY2011 – Tupperware sales growth should outpace the HHPC peer set with acceleration to 6-7% organic sales growth in 2011. The company’s geographic footprint is attractive with 50%-55% of global sales from emerging markets versus a 20%-30% HHPC peer average.
3. Valuation is undemanding – They see more than 30% upside to their 12-month. P/E- and DCF-based price target of $60. Current valuation is undemanding at 10X-11X our 2011 EPS estimate. Goldman views this as attractive for a company that has exhibited consistent organic sales growth. In addition, TUP has lowest PEG in the HHPC sector at under 0.9X FY2011E.
Improved capital allocation could drive multiple expansion
Goldman expects net debt/capital will drop below management’s 0.2X target during 2011, at which point TUP will have substantial cash-flow flexibility.
- See big dividend hike as debt levels move to near-zero – Tupperware is poised to see debt/capital fall below its target 0.2X by mid-2011. With this significant cash flow flexibility, they are forecasting an increase in the dividend from the current $1.00 per share to $2.80 in 2012 (60% payout ratio).
- Expect TUP to return to historic payout levels – The company’s payout ratio was 55% or higher from 1999-2005 until the company acquired Sara Lee’s direct selling subsidiary. The current dividend of $1.00 per share only suggests a 28% dividend payout ratio, the lowest ratio in the company’s history for the past 10 years and below the peer group average.
- Other uses of cash seem unlikely – Goldman sees acquisitions or big buybacks as unlikely based on management commentary. Tupperware appears settled in its brand portfolio with ample room for organic growth. The company is also reluctant to make major share repurchases due to the relatively low liquidity in the stock. They would note that they do expect moderate buybacks of $60 mn-$70 mn per year with the remaining cash flow after dividends.
- Goldman believes improved capital allocation could increase the quality and visibility of earnings and drive P/E expansion. Investors have historically been wary of the direct selling business model due to the limited visibility into the business and higher volatility of results relative to other Consumer Staples companies. This said, a 2-3 fold increase in the dividend could give investors more comfort in the quality and visibility of earnings, and they believe could result in P/E expansion. Firm's forecast for a 60% payout ratio would be significantly above its HHPC peer average of 30%-40%.
Notablecalls: Given the Equinix (NASDAQ:EQIX) blunder, I'm barring myself from sharing
any opinions for the time being.