Adding Reynolds to the Long Bias list (REYN)
We are adding Reynolds Consumer Products to our Long Bias list. The company went public at the end of January. The company manufactures products in three broad categories: cooking products, waste and storage products, and tableware utilizing the Reynolds and Hefty brands. 55% of sales are branded, and 45% is private label. Notably, private label penetration has not grown in the past ten years.
Graeme Hart, through his Packaging Holding, owns 74% of the company. Reynolds Consumer Products was assembled when Hart’s investment vehicle Rank Group acquired Alcoa’s packaging and consumer business in 2008. It has had a series of acquisitions since then, including Pactiv. An activist campaign is unlikely due to the controlling stake. However, the largest shareholder would likely welcome a constructivist.
Unlike most consumer staples companies, Reynolds will grow revenue and earnings next year compared against the pandemic. Our investment case includes:
- Reynolds enjoys high margins and generates significant cash flow. Two-thirds of revenue comes from businesses in which it is the market share leader.
- There are growth opportunities internationally and in innovation. The company’s goal is to generate 20% of revenue from products that are less than three years old.
- Reynolds is positioned to benefit from foodservice trends improving, schools re-opening, and larger gatherings resuming.
- There was limited stockpiling of Reynolds products, so it does not face the difficult comparisons that most consumer staples companies have.
- It came public with 3.5x leverage, and it will nearly reach management’s 2.5x goal at year-end, a year early.
- The CEO purchased 16,500 shares on Nov. 16.
- Shares are trading at a modest 15x EPS for a consumer staples company with visible organic growth and strong returns.
We will focus our research on the company's growth opportunities, a better understanding of its manufacturing competencies, and raw material sourcing - stay tuned. For more details, please see our separate note.
Big growth targets for non-dairy milk (STKL)
According to SPINS, plant-based milk makes up 16% of the total milk market, including dairy. That is up from 14% in 2019 and 13% in 2018. In the year ended Oct. 10, non-dairy milk sales have increased by 16.4% to $2.3B. Oat milk has surpassed soy to be the #2 plant-based milk with a 10% share. Almond milk remains #1 with 63% of plant-based milk. Unilever announced this past week that it set a $1.2B target for its sales of meat and dairy alternatives over the next five to seven years, a fivefold increase. Danone’s target announced months earlier, is $6B by 2025. SunOpta has three planned expansion projects to increase its capacity and capabilities in plant-based milk.
The National Milk Producers Federation has lobbied the FDA for years to enforce existing regulations to stop plant-based milk companies from using the term “milk” for their product. A spokesperson for the FDA said, “The FDA shares the concern that the labeling of some plant-based dairy alternatives may lead consumers to believe that these products have the same key nutritional attributes as dairy products.” The FDA has said it is currently considering more guidance on products using “milk” to describe their product.
Online grocery shopping will be sticky (KR)
According to a survey from Oracle Grocery Retail, 53% of more than 500 consumers polled said they shopped online for groceries during the pandemic. 37% purchased more frequently online than in stores. 93% of respondents plan to shop online for groceries after the pandemic is over, while 74% said they would order groceries similarly in the future to what they are doing currently. Respondents with children were more than twice as likely to buy groceries online than those without kids at 82% vs. 36%. 72% of online grocery shoppers choose home delivery, 28% choose to click and collect, 15% use a curbside pickup, and 13% retrieve their groceries inside the store. 61% of Generation Z said they purchased groceries online compared to 60% of Millennials, 72% of Generation X, and 30% of Baby Boomers. The pandemic encouraged older Americans to try something they probably wouldn’t have otherwise, order food online. Baby Boomers saw a 173% increase in the number ordering online.
Kroger has probably made the biggest investments in e-commerce of the grocery stores, but it is relying on Ocado’s technology.
