‘Reynolds is attractive’ — Cramer makes buy call on newly public company

CNBC’s Jim Cramer on Thursday recommended a newly public consumer goods company that could be attractive to investors.

Reynolds Consumer Products, the maker of recognizable household and kitchen brands including Reynolds, Hefty and Diamond, began trading on the public market in late January after an initial pricing of $26 per share.

The stock is up more than 13% to $32.43 per share since its debut.  

“Given the low valuation versus its other competitors, I think Reynolds is attractive here, but the company reports its first quarter out of the gate next week and the stock has run,” the “Mad Money” host said. “I recommend putting on half your position here, and then wait and buy more if it pulls back below $30 after the earnings.”

Cramer pointed out what’s called a price-to-earnings ratio, which is used by Wall Street to value a company by measuring its current trading price to its earnings projections.

Reynolds shares sell for 18 times next year’s earnings estimates, a cheap valuation when compared with its peers, Cramer noted. Clorox sells for 27 times 2020 earnings estimates, while Colgate-Palmolive and Procter & Gamble are both north of 20.

With the U.S. economy in freefall due to the coronavirus pandemic, investors have shifted their positions to defensive plays, or equities that typically perform well in recessionary periods.

“And when you’re in a recession … you shouldn’t be aggressive. It doesn’t work. You should be defensive, and you’ve got to stick with defensive stocks like the … consumer packaged goods plays,” Cramer said. “These stocks are big winners for the year, although they’ve pulled back a bit over the last couple weeks as Wall Street’s gotten more bullish on the economy.”

In the stay-at-home economy, consumers have loaded up on groceries and other home essentials. For instance, Kellogg said its Eggo waffles sales spiked 45% in March as people eat breakfast at home more often.

Reynolds makes products that are useful in all segments of the cooking and eating process, including aluminum foil, foam dishes, plastic cups and trash bags, among other items. The company is one of the top players in most categories it competes in, Cramer said.

Furthermore, a large portion of Reynolds sales and profits come from private-label, or store-brand, products.

“We know consumers flock to private label during recessions” when the “nationally branded stuff starts to feel too expensive, but Reynolds wins either way,” Cramer said. “Plus, they’re the exclusive private-label supplier to Amazon for this stuff, which I think could be huge in an era where people are increasingly buying household supplies online rather than going to the store.”

Reynolds has had trouble growing revenues. Annual sales have hovered around $3 billion in recent years, Cramer noted, and actually shrank 3.5% in 2019. The company, however, has managed to improve its margins by cutting costs to boost net income by nearly 28%, according to Factset.

Revenue is projected to grow about 3% in each of the next two years.

When Reynolds publicly reports corporate earnings for the first time in a week, analysts are expecting $696 million in revenue and 27 cents of earnings per share.

“Reynolds reports next week. I expect a phenomenal quarter, but some of that’s already priced into the stock after that run. The thing is, this situation is temporary,” Cramer said.

“If you believe Americans will keep avoiding restaurants until there’s a coronavirus vaccine, then the growth could hold up through next year, but long-term it’s simply … not sustainable.”

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