Reynolds Consumer Products Feels The Sting Of Inflation
If you need more than the CPI report to know that inflation hasn’t peaked take a look at the Reynolds Consumer Products (NASDAQ: REYN) Q1 earnings report. The company reported a slightly better than expected margin but has yet to recoup its pre-pandemic profitability, which won't come for another quarter or two at least. The company also says price pressure is still present and there is a need to increase its own prices which is a headwind for both the company and consumers. While there is a glimmer of hope that inflationary pressures are reaching a peak, it’s still too soon to tell and pricing actions are having an impact on volume as well. The takeaway for investors is that income is still substantial and the dividend is safe, but we aren't expecting a lot from the stock price.
“We continue taking action to fully recover pre-pandemic profitability and have implemented another round of price increases to offset additional commodity cost increases,” said Michael Graham, Chief Financial Officer. “Our commitment to profit recovery remains unchanged as evidenced by our pricing actions. We also remain focused on automation and other Reyvolution initiatives to improve earnings and cash flow and expect to see a return to earnings growth in the second half of the year.”
Reynolds Has Mixed Quarter, Shares Pop
Reynolds did not have a bad quarter but it did have a very mixed quarter in which revenue was supported by pricing actions and yet still fell short of the consensus. The $845 million is up 11.6% from last year, however, and last year’s Q1 was a company record. The bad news is that revenue missed the consensus by 170 basis points due to weak volume in two of the four operating categories. The Cook & Bake segment fell -by 1% despite pricing increases due to a 14% decline in volume while the Presto segment saw a small increase in revenue offset by a decline in volume. The Hefty and Tableware segments saw robust double-digit growth underpinned by pricing and volume.
Moving on to the margin, the news here is mixed as well. The Cook & Bake and Tableware segments both saw a large double-digit decline in earnings while the Hefty and Presto segments saw small single-digit increases. The takeaway here is that net income is down 30% versus last year due to higher materials, manufacturing, logistics, and advertising costs. This means consumers can expect a significant price increase if they haven’t already seen one and there may be more price increases later in the year.
Turning to the guidance, it reflects both the presence of price increases as well as inflation. The company basically reiterated the prior guidance but see revenue at the high end of the range and EPS at the low end. This leaves revenue above consensus and EPS below and there is more news to keep the market cautious. The Q2 guidance is expecting both revenue and EPS weakness which means pricing increases won’t really take hold until Q3. In that scenario, there are both upside and downside risks for the market and that may keep price action rangebound for the foreseeable future.
The Technical Outlook: Reynolds Consumer Products Is Rangebound
Reynolds Consumer Products popped in the wake of the Q1 report but the action is, well, mixed. The candle confirms both support and resistance and the top and bottom of a range that may dominate price action in the near to mid-term. The good news is the stock yields over 3% and there is an expectation for dividend growth. Longer-term, if the company can recover its margin we see price action moving up and out of the range. If not, Reynolds may remain rangebound until there is some other fundamental change in the market. We don’t see it moving lower, or much lower, due to its status as a consumer staples juggernaut and high yield.
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