If you’re nervous about the economy because of sluggish job growth, maybe it’s time to play a little defense in your portfolio.
That’s what insiders at the consumer staples company Reynolds Consumer Products (REYN) are doing. Follow them into this name, and not only do you get a “steady Eddie” defensive stock, but you get a nice 4% yield, as well.
As the name suggests, this is the company behind a bunch of stuff you might have in your kitchen—like Reynolds Wrap or Hefty trash bags. It also sells products like disposable aluminum pans, parchment paper, freezer paper, wax paper, butcher paper, plastic wrap, baking cups and oven bags.
This company has brand power. It has the #1 or #2 U.S. market share position in most of its product categories. Over 50% of its revenue comes from products that are #1 in their respective categories.
All that brand power doesn’t seem to be helping. The stock is down 27% in the past year, and sales grew just 1% in the second quarter. What are the headwinds?
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Reynolds (REYN) Facing Headwinds
People are eating more often in restaurants and ordering in prepared food more frequently. Consumer confidence remains low, which makes consumers trade down to off-brands. The company cites cuts in SNAP (food stamp) benefits.
Besides the sluggish sales growth, second-quarter net income fell too (by 25%), mainly because the cost of sales increased by $38 million to $712 million. The increase was primarily driven by higher material, manufacturing and logistics costs. The company also cites costs to execute strategic initiatives, CEO transition costs and the lapping of a $10 million one-time tax benefit in the three months ended June 30, 2024.
What is the company doing to turn things around? It cites product innovation, including “sustainable” offerings. Examples of innovation include the recently introduced Hefty scented waste bags and Fabuloso brands, which are performing well. For sustainability, Reynolds points to the acquisition of a company called Atacama. It provides proprietary technology for Hefty ECOSAVE compostable cutlery, which is being introduced at major retailers with promising early results.
Reynolds recently hired a new Chief Commercial Officer and head of Hefty Tableware to drive growth. The company is also working on supply chain improvements.
One potential drawback here is the boatload of debt, at $1.7 billon against a market cap of $4.8 billion and cash of $65 million. But Reynolds produces a lot of cash. It has a net debt to EBITDA ratio of 2.4, which is reasonable. Meanwhile, the stock looks cheap, trading at about a 20% discount across the board to trailing five-year average price to sales and trailing and forward p/e levels. As a defensive consumer products company, its stock may hold up better in any market pullbacks.
The Insider Buying That Put This Defensive Stock on My Radar
The insider buy that catches my attention is a large $5.3 million purchase by John Hawkesby, a director. This gets discounted as a signal a little because it was made through a fund called Hawkesby Management. But the purchase still gives him greater exposure. Another director recently bought $190,000 worth of stock. They bought at prices up to 23.16. The discounted value suggests—but does not guarantee—limited downside. The insider buying suggests potential upside. Meanwhile, you get 4% yield, which is not bad. This seems like a “core holding” kind of stock.
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