Over the past six months, Reynolds’s shares (currently trading at $22.98) have posted a disappointing 5.6% loss, well below the S&P 500’s 7.5% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Reynolds, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Reynolds Will Underperform?
Even with the cheaper entry price, we’re cautious about Reynolds. Here are three reasons you should be careful with REYN, plus one stock we’d rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Reynolds’s quarterly sales volumes have, on average, stayed about the same over the last two years. This stability is normal because the quantity demanded for consumer staples products typically doesn’t see much volatility.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Reynolds’s revenue to stall. This projection doesn’t excite us and suggests its newer products will not catalyze better top-line performance yet.
3. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Reynolds has bad unit economics for a consumer staples company, giving it less room to reinvest and develop new products. As you can see below, it averaged a 25.4% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $74.57 went towards paying for raw materials, production of goods, transportation, and distribution.
Final Judgment
Reynolds falls short of our quality standards. After the recent drawdown, the stock trades at 14× forward P/E (or $22.98 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Reynolds
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