Buy Avon At A Discount To Buffett's Valuation

May.28.12 | About: Avon Products, (AVP)

By Jonathan Yates

For emerging market investors, Avon stock (NYSE:AVP) offers an opportunity to capitalize on two of the most important financial forces reshaping the globe: the expanding consumer class and the rising economic power of women.

Avon stock can currently be bought at a huge discount to the value set by Warren Buffett, legendary investor and head of Berkshire Hathaway (NYSE:BRK.A).

Avon sells personal care and consumer goods, chiefly for women, on a door-to-door direct marketing model utilizing independent representatives.

Due to a currently outmoded approach, poor results and executive changes, Avon has been downgraded twice in May, once by UBS and the other by Caris & Company.

As a result the Avon stock price, around $16.70, is very close to its 52-week low. The price-to-sales ratio is now under 1, making it appealing to value investors. Always a strong income stock, Avon now offers a 5.55% yield. The payout ratio is over 100%, so a reduction in the dividend could be coming, particularly with new management.

For value investors, Avon's worth was made clear by the recent $10.7 billion bid from Coty, the world's largest fragrance company. With the blessing of Warren Buffett, Coty raised its bid by 6.5% to a peak offer of $24.75 a share. After resistance from Avon, it withdrew the bid on May 15.

Investors should look at the current share price level juxtaposed with the bid from Coty and the 'blessing' of Warren Buffett, and what others deem appropriate for Avon. Said Michael Biffer, founder of Biffer Capital:

I don't think they will (take up the offer of $24.75). They know that the current bid is too cheap. Cosmetics is a great business. It deserves a premium. If I were them, I would ask for $28 or more.

It would appear as if the market is overreacting, and over the long term, Avon stock will surely rise again. As another legendary investor - George Soros- once observed, in the short term, financial markets are "chaotic". The chart below shows the opportunity for emerging market investors once market efficiency makes its presence felt in Avon's share price.