Reynolds Consumer Stock: Attractive and Stable Value (NASDAQ:REYN)

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Investment thesis

I think Reynolds Consumer Products (NASDAQ: REYN) is a good buying opportunity for investors looking for a company with generally stable and predictable total annual returns. I believe the forward P/E ratio is currently favorable, its products are common items found in almost every household, the stock has a low beta and a good forward dividend yield.

Introducing Reynolds Consumer Products

Reynolds Consumer Products is a homeware manufacturer. The company manufactures and sells kitchenware, garbage and storage products, and tableware. Reynolds Cooking & Baking, Hefty Waste & Storage, Hefty Tableware and Presto Products are its four reportable segments. Revenue is generated by the company in the United States.

Industry Outlook

As the industries served by Reynolds Consumer Products are mature, without significant breakthrough innovations or other catalysts, its future growth level is expected to be around 2.5%. This is the historical growth rate that can be observed in most consumer product industries.

Competition

The domestic consumer goods market in the United States is mature and highly competitive. Its competitors include consumer goods companies, including large, well-established global companies and smaller regional and local companies.

Among those rivals are The Clorox Company (CLX), SC Poly-America, Handi-Foil Corporation, Republic Plastics, Trinidad Benham Corporation and Inteplast Group.

The majority of its items compete with other high-profile brands and private label products in every product category.

Price, quality and brand awareness are likely to be factors influencing competition in its categories.

Company

activity Descrition

Market capitalization

Last year’s revenue growth

Reynolds Consumer Products (REYN)

Reynolds Consumer Products is a homeware manufacturer.

6.10B

8.98%

The Clorox (CLX)

Clorox, which has been around for over a century, is now present in a wide range of consumer product categories, including cleaning products, laundry care, trash bags, cat litter, charcoal of wood, food dressings, water filtration products and natural personal products. -care items. The company’s portfolio also includes Liquid-Plumr, Pine-Sol, SOS, Tilex, Kingsford, Fresh Step, Glad, Hidden Valley, KC Masterpiece, Brita and Burt’s Bees.

17.75B

9.22%

Source: Morningstar and Seeking Alpha

Competitive position

According to Reynolds Consumer Products’ latest annual report, its branded and private label products are in 96% of US homes, and the company claims to hold the #1 or #2 market share position in most product categories. in which he competes. They claim to have increased their market share by investing in their product categories and continuously producing new items that meet the changing demands and tastes of contemporary consumers.

Reynolds Consumer Products’ annual statement states that:

  • The company is the #1 consumer sheet market in the United States by sales and volume
  • For nearly 70 years, the most trusted brand in the consumer foil industry.
  • Has the largest brand market share in the outdoor trash liner and slider liner industries in the United States and the second-largest brand market share in the tall kitchen trash liner category.
  • Its Hefty-branded party cups have the highest market share in America.

Moreover, they are in partnership with some of the biggest name retail companies. About 30% and 15% of its revenue comes from Walmart (WMT) and Sam’s Club, respectively.

Overall, Reynolds Consumer Products has a very long operating history, appears to have a trusted brand name, and is a leader in various categories, making it a sought-after strategic partner for large retailers. I believe these characteristics are key competitive strengths in the industries in which they operate.

Valuation and financial performance

Base Stats Comparison:

index

PER before

Gross margin

Free Cash Flow Margin

Sales growth over 3 years

EPS growth over 3 years

Debt Equity

Reynolds Consumer Products

6:48 p.m.

21.59%

4.77%

4%

12%

1.22

The Clorox

27.62

35.80%

7.92%

6%

-2%

8.11

Source: Alpha Research

Revenue growth at Reynolds Consumer Products was primarily driven by increased home product revenues in 2020, which I suspect is related to the COVID pandemic. In 2021, there was a strong increase in sales, mainly due to a combination of price measures implemented due to rising material costs which led to higher prices. The company has experienced very good profit growth in recent years. Going forward, due to the nature of the business, I would say it is more realistic to grow revenue and profit at an annual rate of 2.5-3.5%.

Although Reynolds Consumer Products has lower gross and free cash flow margins than Clorox, its EPS growth is higher and its capital structure is much more attractive.

Reynolds Consumer Products is much cheaper than Clorox, and just slightly more expensive than the current median S&P 500 P/E ratio of 15.

Additionally, Reynolds Consumer Products has a very low beta of 0.28.

Q2 2022

On August 9, the company will release its results for the second quarter of fiscal 2022.

A potential headwind for the business is the impact of inflation on the business. Due to rising material costs, the company’s gross margin decreased from 29.82% in 2020 to 21.60% in the past 4 quarters. Material costs have come down a bit over the past few months. However, according to the latest annual report, Reynolds Consumer Products maintains a FIFO inventory method (an inventory valuation technique based on the principle that the first products are sold first). This could potentially mean that the drop in material prices over the past few months is not yet factored into the new gross margin. The CEO says in the latest quarterly earnings call that the effect of inflation has been factored into the 2022 estimates. Since the effects of inflation are most likely factored in for the most part, I suspect that a decrease in gross margin will not influence the stock too much. Overall, I expect earnings numbers to be relatively similar to recent quarters.

Final take

Reynolds Consumer Products’ stock price hasn’t budged much in the past 1.5 years. As this is a stock in a mature market without, in my view, huge catalysts, I don’t expect the stock price to skyrocket.

The company has a very long operating history, with common items found in nearly every American home, and has strategic partnerships with some of America’s largest retailers. Additionally, the stock is relatively stable as it is up 2% in the past 12 months compared to the 6% decline for the S&P 500. The stock’s low beta indicates very low price risk. While I don’t expect excessive price appreciation, the stock offers a good forward dividend yield of 3.17%. As the forward price/earnings ratio is quite attractive, I think this stock is a buying opportunity for investors looking for a stock with fairly predictable and stable total returns.

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