One of the stocks missing out on the rally in recent months is consumer products maker Avon (AVP) as it could not escape the terrible conditions for retailers in the holiday season. As a result, the stock tested the low end of its long term $15-$45 trading range, in which it has been trading for over a decade.
Octobers profit warning
At the end of October conditions have deteriorated so much that Avon had to drop its "mid single digit revenue growth" target for 2011 as the fourth quarter really disappointed (Q4 earnings will be released in February). As a result the stock tanked, losing some 17% to close at $19.
As a result of the disappointing holiday season, the company decided to separate the roles of Chairman and CEO. Effectively, CEO Andrea Jung became Chairman, and she together with the board will look for a replacement CEO to guide the company forward.
Looking into the warning
What does the warning imply? In the first 9 months of 2011 revenue came in at $8.1 billion vs. $7.5 billion in 2010, implying 8% annual revenue growth. Net income came in at $510 million vs. $373 million, up 37% year-on-year. Earnings per share came in even a bit higher at 39%.
The fact that the company had to let go its mid-single-digit revenue growth rate is extremely disappointing. The 5% growth rate implied annual revenues of $11.2 billion for the full year (analysts even expected $11.5 billion annual revenue). 5% growth implies fourth quarter revenues to come in at less than $3.1 billion, which compared to $3.2 billion in the same period last year. This probably also does not mean much good for profitability during the quarter which came in at $0.50 per share last year, or $227 million.
The holiday season in 2011 has been terrible -- just check what happened to Sears (SHLD) or Best Buy (BBY). If we assume that Avon has seen its profitability half in the last quarter it implies earnings per share of $0.25 for the period or $1.45 for the full year (compared to $1.36 in 2010). On this metric the stock trades at a mere 12 times earnings. On top of that, annual dividends have reached $0.92 after the company has raised dividends by 4ct per annum over the last years, implying a 5% dividend yield.
To illustrate the potential in Avon, consider Estee Lauder (EL), which has been in a similar position in the last decades. It too traded within a long term trading range until it broke out in 2010 and nearly tripled in value in just 2 years. Its shares trade at 2.3x annual revenue compared to 0.8x for Avon, and even at 30 times earnings vs. 12 times for Avon.
Despite dramatic returns in the last year, future returns in Avon could look very bright.