Adding Reynolds to the Long Bias list (REYN)
Reynolds Consumer Products manufactures products in three broad categories: cooking products, waste and storage products, and tableware utilizing the Reynolds and Hefty brands, among others. 55% of sales are branded, and 45% is private label. Notably, private label penetration has not grown in the past ten years. The company’s four segments are as follows:
- Reynolds Cooking & Baking, the largest segment, the company has a 50% market share without a meaningful branded competitor. The company has a 64% share in the U.S. and 72% in Canada in aluminum foil.
- Hefty Waste & Storage has the highest margin of the company’s segments. It has the #1 share in outdoor bags.
- Hefty Tableware produces branded and private label plates, cups, and cutlery. In plastic cups, the company has a 49% share.
- Presto Products is the smallest in revenue and margins. It has a 57% share of private label food storage bags and a 26% share of the total category.
Reynolds has 17 manufacturing facilities in the U.S. and Canada. 99% of revenues are from North America. The company’s manufacturing is so efficient even Amazon uses Reynolds as its exclusive supplier for its aluminum foil, trash bag, and food storage bag private label products. 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, we believe 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 due to capacity constraints, so it does not face the difficult comparisons to the same extent 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.
- The company's 3% dividend yield points to its strong cash returns as well as attractive valuation.
We will focus our research on the company's growth opportunities, potential cash uses, a better understanding of its manufacturing competencies, and raw material sourcing - stay tuned. Our updated position monitor is as follows:
