In this article, let's take a look at Avon Products Inc. (AVP, Financial), a $4.4 billion market cap company that is the world's leading direct marketer of cosmetics, toiletries, fashion jewelry and fragrances, with about 6 million sales representatives worldwide.
Technology
The company should take some actions immediately, like more investments in technology and infrastructure and make efforts to develop the portfolio. For example, after several years of lack of investments, the management has planned an incremental $150 million-$200 million over three years. We believe this is the right way in order to become profitable in the long run. Further, the firm is cutting losses in areas and businesses as well as trying to focus on other opportunities.
Beyond exiting South Korea and Vietnam, Avon is cutting ties with Silpada. At the time the deal was announced, we questioned how this business would enhance the competitive position of Avon's representatives, and it now appears management shares our take. While we view these moves favorably, we question why Avon also wouldn't look to exit the Chinese market, which despite its comparatively small size has been a black eye for the firm, as results have languished for years.
Divestitures
Avon completed its divestiture of its Silpada business while exiting from regions such as South Korea and Vietnam. Other market where it can exit is the Chinese market.
Estimated One-Year Price
According to Yahoo! (YHOO, Financial) Finance, the estimated one-year target share price is $ 12.27, so if you buy shares at current market price ($10.13), your return from price appreciation would be 21.12%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $0.24 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.5%. So the total expected return for investing in Avon is 23.6%, which we believe is an attractive stock return.
Revenues, margins and Pprofitability
Looking at profitability, revenues decreased by 7.96% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.21 vs -$0.01).
The gross profit margin is rather high; currently it is at 64.23%. The net profit margin is negative but is ranked higher than 51% of the 1681 Companies in the Household & Personal Products industry. Considering the liquidity of the firm, the quick ratio of 0.67 demonstrates the lack of ability to cover short-term liquidity needs.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AVP | Avon Products | -12.73 |
| USNA | Usana Health Sciences Inc | 30.67 |
| IPAR | Inter Parfums Inc | 5.36 |
| RDEN | Elizabeth Arden Inc | -37.67 |
| MED | Medifast Inc. | 22.05 |
| Â | Industry Median | 8.75 |
The company has a current ROE of -12.73% which is lower than the industry median and the one exhibit by Inter Parfums Inc. (IPAR, Financial) and Elizabeth Arden (RDEN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Usana Health Sciences (USNA, Financial) and Medifast (MED, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 4.85x indicates a premium versus the industry average of 2.05x while the price-to-sales ratio of 0.48x is below the industry average of 1.13x.
Final comment
As outlined in the article, we have seen multiple weaknesses, such as its complicated liquidity situation, disappointing ROE and also the performance of the stock price. Despite its weaknesses, we still think the company has a well-known brand, a global geographic reach and an attractive business model.
We continue to believe that investors would be making a short-sighted error not viewing Avon for what it is, which has a bright long-term future.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and NWQ Managers (Trades, Portfolio) have added the stock in the third quarter, while Donald Yacktman (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) have reduced their positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned
