In early afternoon trading Tuesday, Tupperware (TUP), a newly-designated meme stock, is up more than 27% on the day, bringing its 5-day gains to more than $311%. As it stands right now, TUP is no longer a penny stock trading under $5.
The volume on the day so far is 111 million, 2.6x its 30-day average. Thanks to the one-week surge, its market cap is a whopping $235 million.
If Tupperware is your cup of tea, I suspect you’ll also be attracted to Newell Brands (NWL), whose market cap is much larger at $4.5 billion but whose stock is also not worth the paper it’s written on.
Heck, if you’re dumb enough to buy TUP, I suggest you should also buy NWL.
Here’s why.
Bankruptcy Is Near for Both
Are you familiar with the Altman Z-Score? It tells you how likely it is that a company will enter bankruptcy proceedings within the next 24 months. Like all financial metrics, it could be better.
It's meant to understand the financial pitfalls a company may face at any given moment. The Altman Z-Score moves higher as a company’s financial situation and business improves. The reverse is true if things worsen.
At the moment, Tupperware’s Altman Z-Score is 1.82. Anything below 1.80 is considered in the distress zone, which means it could face bankruptcy within the next 24 months. It’s teetering between the grey zone and the distress zone.
As for Newell, its Altman Z-Score is 1.3, slightly less than Tupperware’s, but more importantly, putting it directly in the distress zone, exposed to above-average bankruptcy risk. Yet, Newell has a market cap that’s nearly 20x Tupperware’s.
How’s that possible?
The Biggest Drivers of the Altman Z-Score
Seven financial metrics are collected from the balance sheet and income statement to calculate the Altman Z-Score. They include working capital (current assets less current liabilities), total assets, total liabilities, retained earnings, sales, earnings before interest and tax (EBIT), and market cap.
Investopedia provides a good snapshot of how it’s calculated:
Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets
So, which of the seven metrics moves the needle the most regarding the Altman Z-Score?
Let’s consider Tupperware’s seven metrics using its trailing 12-month financials from Morningstar.com and its latest 10-Q.
A = working capital / total assets = $108.1 million / $1.05 billion = .1026
B = retained earnings / total assets = $1.13 billion / $1.05 billion = 1.08
C = earnings before interest and tax / total assets = $107.6 million / $1.05 billion = .1021
D = market value of equity / total liabilities = $235.7 million / $1.23 billion = .1916
E = sales / total assets = $1.39 billion / $1.05 billion = 1.3238
Pump the numbers from above into the calculation above.
= 1.2(.1026) + 1.4(1.08) + 3.3(.1021) + 0.6(.1916) + 1.0(1.3238)
= .1231 + 1.512 + .3369 + .1150 + 1.75 = 3.84
According to my calculation, Tupperware’s Altman Z-Score is actually 3.84, double the number I got from GuruFocus.com.
There’s a very good explanation for this.
Tupperware hasn’t filed a financial report with the SEC since Q3 2022. So, parts B and E of the equation -- the biggest influencers of the score -- don’t accurately reflect that the company could go out of business. It even said so in April.
It did report preliminary Q4 2022 results in March, but as of yet, it’s failed to finalize these statements with the SEC.
According to its press release, sales fell 18% in 2022, with adjusted earnings of $22.5 million, down from $175.4 million a year earlier. While the business is deteriorating, things don’t seem terrible relative to some stocks trading on the Nasdaq and the NYSE.
However, if the Q4 2022 preliminary results are accurate, the company finished 2022 with net debt of $605 million, nearly 3x its market cap. That is high. Further, its cash position undoubtedly worsened in Q1 2023, ratcheting up its leverage even higher than it already was.
The biggest problem for Tupperware is that it is a direct-selling organization whose sales force is shrinking. No sellers, no sales. That’s a bleak picture for a highly-leveraged business.
What About Newell?
In recent years, Newell got very bloated with many brands that didn’t deliver too much sales. In May, Chris Peterson took over as CEO. It immediately announced that it was implementing a new strategy focusing on its best and most profitable brands. According to Canaccord Genuity analysts, 25 of its 80 brands account for 90% of its sales.
“We believe this simple strategy is just what the company needs: focus on and invest behind what sells profitably and exit anything that doesn’t,” Barron’s reported the analysts’ comments in mid-July.
Canaccord Genuity initiated coverage of NWL with a Buy rating and a $13 price target, 20% above where it’s currently trading. However, a couple of weeks after Canaccord Genuity initiated its coverage with a Buy rating, the company cut its full-year expectations for sales and earnings.
At the midpoint of its guidance, it expects 2023 sales to be $8.27 billion, down from its previous estimate of $8.5 billion. On the bottom line, it now expects adjusted earnings of $0.85, down from $1.02.
The company blamed “high levels” of core inflation and the resumption of student loan repayments for worsening its outlook for sales and earnings.
That’s a couple of poor excuses if you ask me.
Newell’s net debt is $5.8 billion, 1.3x its current market cap, also higher than should be comfortable for most retail investors.
I wouldn’t touch these businesses until they’ve proven they’re on the road to recovery. Neither has done so.
Don’t waste your hard-earned dollars on either Tupperware or Newell. You won’t be missing out by taking a pass.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
