RealMoney Silver - TUP Looks Good, but Don't Seal the Deal

TUP Looks Good, but Don't Seal the Deal
By Bill Trent
RealMoney.com Contributor
2/7/2008 6:17 AM EST

When Tupperware (TUP) reported 93 cents a share in quarterly earnings last week, it marked at least the fourth consecutive double-digit percentage earnings surprise. The expectation is clearly for that to continue, as the six analysts reported by Yahoo! Finance to be covering the company have all raised their 2008 earnings estimates in the last month.

With nearly 84% of the company's sales coming from international markets, Tupperware has seen a tremendous benefit from the weaker dollar and should be well insulated from a U.S. economic slowdown. It could even be modestly counter-cyclical should a slowing job market increase the pool of salespeople.

Due to the surprises and positive estimate revisions, Tupperware's Zacks Rank improved to 1 last week, putting the company in the top 5% in terms of earnings revision momentum among the companies followed. Better still, in addition to momentum, it still looks like there is value in Tupperware shares.

To begin with, the shares currently trade at just 14.3 times the consensus estimate for 2008. If the double-digit surprises continue, the multiple might be more like 13 times. Over the past five years, Tupperware has averaged at 15.1 times its price-to-earnings ratio, with a low of 9.6 times.

Better still, in my opinion, is the free cash flow generation. Operating cash flow in 2007 was $177.4 million, and net capital expenditures were $32.4 million. The $145 million in free cash flow amounts to a 6.5% free cash flow yield on the current market value. (Net of interest, the free cash flow to the firm offers a similar yield to the enterprise value.) This yield is more than double the current five-year Treasury yield, and Treasuries don't offer the 15% earnings growth that Tupperware is (and is expected to continue) generating.

When it comes to earnings quality, Tupperware's is about as good as it gets. The accrual ratio, which measures the relationship between accounting based earnings and cash earnings, ideally should range around zero.

Tupperware Accrual ratio

Click here for larger image.

Source: Zacks Research Wizard, compiled by William A. Trent

With the exception of a blip caused when Tupperware acquired Sara Lee's (SLE) direct selling businesses in December 2005, Tupperware's accrual ratio has been as tight as any I've seen.

Tupperware's price/book ratio of 5 is reasonable, and its 30% return on equity implies a sustainable growth rate higher than the consensus growth estimate. With limited valuation downside and double-digit growth, Tupperware stock should be well primed to earn annual returns of 15% to 20% over the next five years.

As good as the Tupperware story seems, however, it is hard for me to come to grips with buying a stock that has surged 45% in just the last three weeks. If nothing else, it seems due for a breather that would take it back to perhaps the 50-day moving average (which would be around $33 per share).

As a result, if I were to play the name, I think I would use a put-write strategy. As I write this, the March $35 put options are going for about $1.60, which would be a 4.5% six-week return on the money risked should the shares continue to rise, and a $33.40 effective purchase price if the puts are exercised. That's close enough to $33 for me.