Avon Products (AVP) reported earnings with top-line revenue rising 3.8 percent to $2.62 billion, less than the $2.69 billion analyst average. Oft-touted income and representative growth for Avon in Brazil and Russia was disappointing, hurting profits. CFO Charles Cramb pointed out service issues unique to the Brazilian market:
“What happened is we put in a new e-invoicing system. It met the government requirements. It worked well. But in terms of data transfers, in terms of the processing time that was required, as you work back to those other interfaces, we did some things that caused disruption in the flow of information. Those are the things that we think we pretty much felt behind us as we end October, going to November.”
Most notably absent from the quarterly report was any mention of buyout rumors that will just not go away. Pundits including Jim Cramer have flagged Avon CEO Andrea Jung as one of the worst operators in the Fortune 500. On the October 18 program of Mad Money, Cramer elaborated on the issue of a buyout:
“You know what? Terrible management… But I will say this… it would shock me if that company continued to maintain its independence. Avon’s too valuable. I think they either get rid of management or it gets a takeover bid. There’s too much longer term value there so I will say buy, buy, buy AVP.”
This recommendation came shortly after word spread of a buyout, after the Daily Mail newspaper said French cosmetics maker L’Oreal SA (OTCPK:LRLCY) would make an $18.8 Billion, $44 per-share bid for Avon. Rumors of a buyout by private equity and leveraged buy-out firms, as well as potential bids by L’Oreal and Proctor & Gamble (PG) have entered the rumor mill.
Today’s price action provides a free call option on a buyout if one or several materialize. Avon shares settled at 31.01 on Thursday after falling as low as 29.01 after today’s disappointing report. This compares to a 33.16 closing price on October 11th, before buyout rumors spread.
Avon shares are cheap in their own right. Avon’s restructuring efforts have hampered margins, which should approach 13-14% within a 3 - 4 year span. The company is also switching to a direct sales model from a retail outlet operation in China. While China sales are less than 3% of the current total, Chinese sales fell 31% as a result of the disruptions while switching. The restructuring masks forward-looking moves on Avon’s part, and the pressures on shares provide a good entry point, with or without a buyout.
Disclosure: Author is short AVP puts