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. With the exception of a blip caused when Tupperware acquired Sara Lee Corporation’s (SLE) direct selling businesses in December 2005, Tupperware’s accrual ratio has been as tight as any I’ve seen.
Tupperware’s 5x Price/Book ratio 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 15-20% annual returns over the next five years.
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 5-year Treasury yield, and Treasuries don’t offer the 15% earnings growth that Tupperware is (and is expected to continue) generating.