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Abstract
This publish is to offer my ideas on Reynolds Shopper Merchandise (NASDAQ:REYN) enterprise and inventory. REYN manufactures and distributes family packaging merchandise. The corporate affords preparation, cooking, cleanup, and storage options similar to aluminum foils, plastic wrap, oven luggage, and sluggish cooker liners. Reynolds Shopper Merchandise serves clients worldwide. Regardless of an improved enterprise relative to pre-Covid, my suggestion is a maintain score, because the inventory appears to be pretty valued primarily based on my DCF mannequin.
Funding thesis
REYN beat the consensus EPS estimate within the most recent quarter by $0.02, reporting $0.32 EPS for 2Q23. Natural gross sales development of three% was primarily pushed by pricing development of three%. Regardless of robust quarterly advertising and marketing for its foil enterprise, quantity was flat. That stated, I consider the advertising and marketing efforts put in 2Q23 ought to have spillover results to 3Q and future quarters as REYN noticed double digits enhance in media impressions throughout main media platforms. Administration additionally deliberately boosted its reliance on social influencers and different acceptable media to realize this higher degree of family penetration amongst millennials and Era Z. These efforts ought to result in sustainable quantity ranges transferring ahead. As well as, throughout the 2Q23 name, administration talked about that COVID allowed the corporate to reset its commerce program, and because of this, the corporate lowered the variety of commerce promotions it ran in 2020 and 2021. In consequence, sources have been directed towards implementing tried-and-true commerce promotion packages and worth level optimization. Subsequently, whereas quantity was flat this quarter, I count on it to select up finally as REYN promotional methods are simpler now.
As well as, I consider the enterprise isn’t much more sustainable from an natural demand and margin standpoint as gross sales that had been pushed by promotion at the moment are a decrease than the 25% throughout pre-covid. This gives administration with an excessive amount of leeway in maximizing quantity (shelf house) via promotion each time obligatory with out sacrificing revenue too drastically. The Reynolds wrap product is an effective instance of this technique in motion; REYN launched non permanent worth reductions [TPR] and required retailers to successfully keep them for a set time frame to be able to safe shelf house and enhance demand. Since TPRs have been so efficient with foil, I anticipate that administration will use the identical technique with their different product traces, which is a lever that administration can pull to extend quantity development.
Specializing in the quantity a part of the story once more, I count on REYN’s built-in enterprise mannequin to profit from potential commerce downs. REYN’s pricing on this mannequin is versatile, permitting the corporate to search out the candy spot the place costs and demand intersect. 2Q23 offered robust proof that that is true as Reynolds wrap elevated its market share within the aluminum foil market by over 5pts on account of elevated shopper acceptance and decrease retail costs, closing the value hole with non-public label merchandise.
Reynolds Wrap gained greater than 5 factors of brand name share within the foil class, gaining much more share than within the first quarter. Reynolds Wrap is responding to an enchancment in retail worth factors and worth gaps versus retailer manufacturers, a return to vacation commerce promotions, which had been very nicely obtained by retailers and shoppers over Memorial Day and main into the 4 of July. 2Q23 earnings results call
Because of these components, gross margin elevated by 419bps to 24.3%, the EBIT margin got here in at a better than anticipated 12.8%, and the EBITDA margin hit its goal of 16%. Administration elevated the underside of the FY23 vary on account of the 2Q beat, even if the 3Q information is anticipated to be barely weak. Administration has forecasted a decline in Q3 income of between -3% and -5%, with costs remaining steady and volumes falling. Close to the quantity decline, I consider it’s nothing structural. On-retail gross sales are accountable for 2% of the decline, whereas retail gross sales are accountable for the opposite 2%. For the latter, it’s largely as a consequence of demand pulled ahead as a consequence of Memorial Day and July 4th holidays, which drove households to refill their family inventories. Subsequently, I consider it’s cheap to anticipate decrease unit gross sales in 3Q. Lastly, REYN can also be lapping its worth will increase final yr, making comps barely harder vs the previous few quarters. The excellent news is that administration has acknowledged that they anticipate quantity development of three% in This autumn. With simple 4Q22 comparisons and rising demand within the essential vacation season forward, REYN shouldn’t have any hassle clearing this bar.
Valuation
I consider the truthful worth for REYN primarily based on my DCF mannequin is $28. My mannequin assumptions are that REYN will develop quicker than the business price of low single digits over its development years because it captures share through simpler promotion methods and its built-in mannequin. Finally, development will decline to a terminal development price of two%, reflecting enterprise maturity. The enterprise is barely cyclical; therefore, I assumed a 9% low cost price, 100bps increased than the S&P 500’s historic long-term return.
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Personal calculation
Danger
As REYN sells lots of plastic-related merchandise (wraps, and many others.), it faces the continued threat of environmental sustainability. Whereas this has not impacted the enterprise in any main manner, incremental stress from buyers specializing in ESG components would possibly cut back funds invested in REYN. This may influence inventory valuations.
Conclusion
To sum up, REYN has proven enchancment in comparison with pre-COVID instances, but its valuation seems pretty priced. Administration’s efforts to boost family penetration amongst millennials and Era Z, adaptable pricing and commerce promotion methods, together with an built-in enterprise mannequin, are anticipated to drive quantity and margin enhancements. My valuation utilizing a DCF mannequin suggests a good worth of $28, making the present share worth pretty valued.