It's no secret that emerging markets hold vast potential. Take the rise of the emerging-market consumer, for example. A report from earlier this year detailed that annual income rates in China quadrupled to $1,910 in the past decade and nearly doubled to $5,739 in Latin America. These rapid rates of growth should only continue in the coming 10 years and beyond.
With a rising consumer class in emerging markets, retail spending will only increase. Yet many of the most compelling emerging markets lack the retail infrastructure to support steadily rising demand. In addition, there is significant political risk and corruption to overcome in these markets. Currently, there is also the threat of inflation and slowing growth in some markets. Yet despite these concerns, the potential for investors to profit from the rise of the emerging-market consumer is enormous.
Because of the challenges Western companies face when bringing goods to new emerging markets, it pays to get creative. One way to overcome the lack of retail infrastructure in these appealing growth areas of the world is to go directly to the consumer. One firm that does this better than just about any other is Tupperware Brands (NYSE: TUP). The company, which grew famous in developed markets for selling its namesake products through in-home Tupperware parties, is bringing the party overseas. The company is growing rapidly in emerging markets, and I think it represents one of the safest opportunities for investors to capture emerging-market growth.
As I said, Tupperware specializes in using parties (which simply consist of neighborhood gatherings at a host's home) as its non-retail strategy to sell its goods. These goods consist of namesake lines of kitchen cookware and storage and serving products that can be used to store food, microwave leftovers and prepare food. It also sells a line beauty products, including cosmetics, toiletries and perfumes.
The company relies on an army of 2.6 million individuals that serve as its sales force. Last year, these individuals hosted 18 million Tupperware parties in about 100 countries. These social gatherings represent an easy method for Tupperware to sell in nearly any location in the world. It is also incredibly efficient and low-cost, as the individuals serve as independent contractors who are not employees of the company. Because of this, sales reps earn commissions, and Tupperware isn't saddled with expensive employee benefits such as health care and retirement perks.
Tupperware's unique business model is a key reason between 84% and 88% of sales take place outside of the United States (56% of last year's $2.3 billion in sales stemmed from emerging markets). The company doesn't break down sales by country, but management has detailed that countries including Brazil, India and Turkey grew more than 60% during the second quarter and are expected to continue growing briskly for the foreseeable future.
Growth in these less competitive markets has resulted in higher profits for Tupperware. Operating margins have risen steadily since 2005 and are up from less than 9% to close to 15% in the past 12 months. Operating income has risen impressively, from $111 million to $365 million during this period. Management has also been vigilant about controlling costs at its headquarters in Orlando, Florida, as evidenced by a steady decline in selling, general and administrative costs, from 56% of sales to closer to 51%.
A slowdown in the global economy has dented sales growth in the past three years, but the expansion into more profitable markets, along with cost controls, have resulted in stellar profit growth. Sales are up about 5% annually since 2008, from $2 billion to $2.5 billion. Earnings have jumped more than 23% annually during this time, from less than $2 to close to $4 per share. Sales are projected to grow more than 14% this year and exceed $2.6 billion. Analysts currently peg earnings at $4.56 per share, good for year-over-year growth of about 20%.
Risks to Consider: Tupperware is subject to political risk and "crony capitalism" in emerging markets, but it should be able to overcome them better than more traditional retailers. And given that the vast majority of sales are overseas, financial results can be impacted greatly by foreign exchange fluctuations. Currency volatility should average out over the long haul, but can result in short-term unevenness in reported profits.
> Tupperware currently trades at a very reasonable forward P/E of about 12. If it continues growing profits at a 20% annual clip, then the stock is worth nearly $96 per share, or 70% ahead of current levels. Projecting out more conservative annual profit growth of 15% suggest still-ample share price upside of close to 60%. (This is based on a discounted free cash flow model and primary inputs of 15% free cash flow growth over roughly a decade, a terminal growth rate of 3%, and cost of capital of 15%.)
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