Avon Looks Pretty - Barron's

"Women aren't going to stop wearing make-up," Barron's says, which is why the magazine predicts shares of Avon (AVP) ($17) could double over the next year.

Shares currently trade near AVP's 52-week low, and at a P/E ratio of under 10 - less than half of its five-year average and cheaper than the low-double-digits commanded by rivals Estee Lauder (EL) and Alberto-Culver (ACV). Avon has lots of cash ($1.1B), and can still access the credit markets as proven by last month's $850M bond sale. It still has $1.8B left on a stock-buyback authorization, and recently boosted its dividend to $0.84 - now yielding more than 5%. AVP has raised its dividend by 9-10% consistently over the past decade.

Bears worry about its exposure to a stronger dollar, considering 86% of its profit come from outside North America. But CEO Andrea Jung says she and her staff have dealt with currency crises before - in Russia, Brazil, and Argentina (see Avon's Q4 earnings call transcript). She boasts that Avon "thrived on aggressively reaching new customers and representatives" even during the Great Depression. General weakness in emerging markets is also a potential pitfall, considering Eastern and Central Europe and Latin America provided 70% of Avon's consolidated profit last year. As is its $2.5B debt load, which prompted all three ratings agencies to issue a negative outlook on its single-A rating.

But Barron's notes that Avon managed to boost operating margin by almost four points to 12.5% in the recessionary economy of 2008, and it's expected to reduce its costs by $300M this year and $430M by 2012 through an aggressive cost-cutting program. "If history is any indication, the restructuring will take hold and lead to strong growth," one analyst says.

Avon plans to take advantage of high unemployment levels by increasing its recruitment of "Avon ladies" - who cost the company nothing up front since they're paid solely on commission (which the company is upping to sweeten the pot). Avon even managed to boost its prices by 6% in 2008, all the while stressing "value" not "discounting." China sales are another potential growth area, rising at a clip of 25%/year.

"I've seen panic in Avon's stock before," Zacks' Steven Ralston observes. "It is always a buying opportunity."

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• Avon is a consistently high-ranker on retail satisfaction surveys, as noted by Marketing Charts.
• Barclays recently downgraded its price target on Avon to $21, noting the stronger dollar, and saying the stock "lacks significant catalysts over the next 3-6 months."
• Clyde McGregor, who manages Oakmark Equity & Income, says he's focused on companies with "Gibraltar-like balance sheets that sell products and services with a 'reason to exist in any environment'" - and he's happy to hold Avon.

Comments

[William Cowie:]

Avon got dragged down by the market. Are they saying it will go up without the market? I don't think so. And, if the market recovers, the question is: is ACV the best stock to own? Different question entirely...

Mar 15 11:18 PM

[KJP712:]

Barrons and Ralston are on the money here.Wait till they get more of a foothold in China then the sky's the limit.Only strong growth moving foward from here.

Mar 15 11:29 PM

[PastTense:]

A huge number of articles in SA are talking about recession/depression. What do people want to do in this kind of situation? Save money. A multi-level marketing scheme (where the associate gets a cut of the sale, her team leader gets a cut, her district manager gets a cut, her regional manager gets a cut...) is a high cost selling method. Instead I would expect women to switch to the Walmart type venues to save costs. People also don't have the time for this type of thing.

The OP doesn't seem to realize this is no longer the 1950s. Is his next post going to be about the Fuller Brush salesman?

Mar 15 11:52 PM

[Vanderpool:]

The Barrons article does not suggest that growth in sales will come only from the US. 86 percent of its revenues come from outside the US.
They suggest a doubling in China and some in Russia. The door to door sales concept is not assumed to be a strong method in the US but is still relevant in economies that are not as "mature" as ours (Economies about where we were in the 1950s perhaps?).
It also says that the average earnings are $2000. This is apparently enough to interest volunteers for the job since their sales force is expanding. A weakening economy often pushes people to be more entrepreneurial and to opt to find jobs where they are their own boss and work their own hours. Avon offers a relatively inexpensive way to do that. The idea that a multi level marketing scheme does not work does not seem to have discouraged tens of thousands of real estate brokers and associates from sharing listings and making satisfactory incomes over the years in this country. So why should it not be valid for Avon which sells cosmetics?
The concern mentioned in the article is of depreciating currencies in the growth markets. This is valid, but apparently Avon is addressing this in part by finding ways to lower their costs and raise prices (Thereby maintaining margins). If the dollar does begin to drop, Avon will be well poised to thrive in the new economy ahead.

Mar 16 11:16 AM