In a previous article, I talked about PNC Financial Services (NYSE:PNC), a financial services firm that Brian Rogers, chairman and chief investment officer of T. Rowe Price, recommended at the 2013 Barron’s Roundtable. In this article, I will focus on another stock that he liked: Avon Products, Inc. (NYSE:AVP), the direct selling company with beauty and fashion-related products.
2012 Losses With High Amount of Debt
Avon, incorporated in 1916, is a global manufacturing and direct selling company in 65 countries and territories with three main product categories: Beauty (cosmetics, fragrances, skin care), Fashion (watches, jewelry, accessories) and Home (decorative products, housewares). The majority of Avon’s revenue, $7.64 billion, or 71.4% of the total revenue, was generated from the Beauty category. The Fashion category ranked second with $1.89 billion in revenue in 2012, while the Home category generated more than $1 billion in 2012 revenue. In terms of geography sales, Avon seemed to be quite strong in Latin America, with nearly $5 billion in 2012 sales. Europe, Middle East & Africa ranked second with $2.9 billion in sales.
$25 Per Share in the Next Two Years
Five years ago, Avon traded at around $40-$50 per share. At this time of writing, the company is trading at nearly $20.50 per share. At the beginning of 2012, Coty, a French beauty products maker, offered to acquire Avon at around $23.25 per share. Several months later, Coty made a second offer of $24.75 per share, valuing Avon at $10.7 billion. What makes Coty interested in Avon was Avon’s distribution abilities and good product R&D. However, as there was no response from Avon, Coty withdrew its bid. Brian Rogers thought that in a friendly transaction, Avon could have gotten a $25 – $26 per share offer. He was betting on Avon’s new CEO, Sheri McCoy, who had been working for Johnson & Johnson for 30 years. McCoy has already launched a big cost-cutting program to get the profit margin back to historical levels. Thus, it might earn $1.50 – $1.75 per share in the period of 2-4 years. If a consumer-products multiple was applied to Avon, Rogers thought Avon’s share price might reach $25 in two years.
Peer Comparison
According to Rogers, Avon’s current problems in several markets were fixable. Tupperware Brands Corporation (NYSE:TUP) also had some problems several years ago, but a new management team came in and fixed those problems. After that, the market recognized the business improvements and drove its share price up. At the current price of $77.50 per share, Tupperware is worth $4.3 billion on the market. It is valued at 21.5 times trailing earnings and 10.7x EV/EBITDA. Avon is valued a bit more expensive at nearly 11.8x EV/EBITDA. As Avon had a negative net income in 2012, the P/E ratio is not valid.
Revlon Inc (NYSE:REV) is the smallest company among the three. It is trading at $21.23 per share, with a total market cap of $1.1 billion. It also seems to have the cheapest valuation, at 9.2x EV/EBITDA. Among the three, Avon had the lowest operating margin at 6%, while the operating margins of Tupperware and Revlon were both 15%. Revlon has not been paying investors any dividends, whereas Avon is paying the highest dividend yield at 3.7%. Tupperware is paying a 1.9% dividend yield to its shareholders.
Foolish Bottom Line
Avon seems to be an opportunistic stock for long-term investors. By buying Avon, investors are betting on new management’s ability to bring the business back to its historical high profitability.
The article Avon Might Reach $25 In Two Years originally appeared on Fool.com and is written by Anh HOANG.
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