Avon Looks Pretty - Barron's

Includes: ACV-OLD, AVP, EL
by: SA Eli Hoffmann

"Women aren't going to stop wearing make-up," Barron's says, which is why the magazine predicts shares of Avon (NYSE: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 (NYSE:EL) and Alberto-Culver (NYSE:ACV-OLD). 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."


  • 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.