Pg. 23 IX. Other Valuation Parameters………………………………………………………………………………Pg. 26 X. Rule #1………………………………………………………………………………………………………. Pg. 28 XI. Conclusions/Final Stock Judgment………………………………………………………………………Pg. 31 XII. References…………………………………………………………………………………………………Pg. 33 XIII. Appendix………………………………………………………………………………………………….. Pg. 35 I. Company History In general, Avon Products, Inc. is a U. S. cosmetics, perfume, jewelry, skin care, personal care and children’s products seller with markets in over 140 countries across the world and sales of $9. 9 billion worldwide. Avon Founder David H.
McConnell offered women a rarity in 19th century America: a chance at financial independence. In 1886, it was practically unheard of for a woman to run her own business. Only about 5 million women in the United States were working outside the home, let alone climbing the ranks of any corporate ladder. That number accounted for just 20% of all women (Avon. com). The man behind the company for women was the son of Irish immigrants and grew up on a farm. Yet, it was this young man from rural New York, a visionary leader decades ahead of his time, who would become a pioneer in empowering women.
McConnell, a bookseller-turned-perfume entrepreneur, would offer women the opportunity to create and manage their own businesses through what later became known as direct selling. David H. McConnell sold books door-to-door and gave out perfume to entice women to buy his books. His perfume proved to be much more popular than his books, so he then founded the California Perfume Company (CPC) in New York, New York. Mrs. P. F. E Albee, a 50-year old wife and mother of two, became the California Perfume Company’s first Representative. The legendary Mrs.
Albee is still considered a role model for Avon Representatives today and is credited with creating the company’s system for distributing products. The California Perfume Company was incorporated on January 28, 1916 by David H. McConnell and Alexander D. Henderson (businessman) in Suffern, New York. By 1918, five million units were sold in North America, and by 1928, sales reached $2 million. In October 1939, the name was changed to Avon Products, Inc; McConnell had visited Stratford-Upon-Avon (UK) and had liked the town so much, that he renamed his company after it.
The company was taken public in 1946 with OTC stock. By 1954, sales reached $55 million, and the "Avon Calling" advertising campaign was introduced, making it one of the largest and most successful advertising campaigns in history (Avon. com). In the 1960’s and 1970’s, Avon was one of Wall Street’s favorite “Nifty Fifty” stocks, a group of well-regarded, “buy and hold” blue chips that also included Xerox, Disney, and McDonald’s. These stocks helped drive the bull market of the early 1970s in the U. S. , with Avon’s stock soaring to $140.
The Nifty Fifty bubble later bursts, sending U. S. stocks plunging. Avon was listed on the NYSE as AVP in 1964. By 1979, sales reached $3 billion, with one million direct sales agents. Today sales exceed $10 billion worldwide. In June 1989, Avon became the first major cosmetic company to announce a permanent end to animal testing on all Avon-manufactured products. Avon does not conduct animal testing on any of its products or raw ingredients and does not require that suppliers of raw ingredients and finished products produced for Avon conduct animal testing on our behalf.
In addition to its corporate pursuits, the Avon corporation is involved in philanthropic causes. The Avon Foundation for Women, an accredited 501(c)(3) public charity, is the largest corporate-affiliated philanthropy for women in the world. Avon has been committed to helping women achieve their highest potential of economic opportunity and self-fulfillment by empowering them through scholarships and support for other forms of educational and occupational training and advancement. The Avon Foundation is currently focused on two key causes: breast cancer and domestic violence.
Through 2009, Avon global philanthropy raised and donated more than $725 million worldwide for causes most important to women. Since 1992 in more than 50 countries around the globe, millions of dedicated Avon Representatives have sold special Avon cause products, raising almost $150 million to end breast cancer and domestic violence and to help in times of global emergencies. In 1999, the first woman CEO was named: Andrea Jung. In 2003, "mark. ", which is targeted to younger, college-aged women, was created to help the company reach out into markets it had not previously serviced. mark. as proven to be successful in reaching a new generation of recruits, primarily young women ages 18–25, with a monthly "magalog" featuring its products. In 2008, reality star Lauren Conrad became a spokesmodel for the brand. Conrad also designed clothing and accessories for the brand. In 2010, actress Ashley Greene would replace Conrad as the spokes model for the brand. Throughout the first decade of the new millennium, Avon began operating in numerous new markets, with heavy expansion in Central and Eastern Europe and the Caribbean Islands. Avon is now in more than 100 markets and is coined to be “the company for women”.
II. Recent News AVP has a market cap of $11. 43B, operating cash flow of $702M, and consistent quarterly dividends around $0. 22 per share, making AVP a leader in personal products globally (Investment Underground). Given AVP’s positioning in the personal products industry, Avon could be a prime takeover candidate for competitors such as The Estee Lauder Company (EL) or French conglomerate L'Oreal SA (LRLCY. PK) looking to expand their reach into the direct sales portion of the personal products market. Because AVP currently has one of the lowest operating margins in the sector (11. 0%), competitors such as EL could view AVP as an attractive investment in hopes of increasing profitability. In turbulent times, people turn inward. The argument for large cap consumer staple companies is that they are familiar names that offer the necessities of daily life. Barron’s Magazine presents a list of ten companies that fit this argument. The underlying thesis is that these ten companies offer cash flow, dividends and predictable growth. This list includes: Avon Products (AVP), Campbell Soup (CPB), Clorox (CLX), Coca Cola Enterprises (CCE), Colgate-Palmolive (CL),
General Mills (GIS), Kellogg (K), Molson Coors Brewing (TAP), PepsiCo (PEP), and Proctor & Gamble (PG). Are these companies really good investments for today? |Ticker |Company |Recent |Price Chg. |Dividend |EV/EBITDA |EV/SALES | | | |Price |52W |Yield | | | |AVP |Avon Products, Inc. |26. 59 |-19. 00 |3. 50 |15. 03 |1. 31 | |CPB |Campbell Soup Company |33. 50 |-4. 00 |3. 50 |13. 01 |1. 9 | |CLX |Clorox Company, The |68. 81 |7. 00 |3. 20 |17. 46 |2. 39 | |CCE |Coca-Cola Enterprises Inc. |25. 81 |-5. 00 |1. 90 |16. 15 |1. 79 | |CL |Colgate-Palmolive Company |76. 95 |-9. 00 |3. 00 |12. 23 |2. 70 | |GIS |General Mills, Inc. |36. 65 |0. 00 |3. 10 |14. 90 |2. 24 | |K |Kellogg Company |54. 17 |3. 00 |3. 00 |15. 49 |2. 18 | |TAP |Molson Coors Brewing Company |43. 5 |0. 00 |2. 60 |12. 87 |3. 20 | |PEP |PepsiCo, Inc. |63. 24 |-5. 00 |3. 00 |15. 58 |2. 25 | |PG |Procter & Gamble Company, The |60. 60 |-5. 00 |3. 20 |15. 05 |2. 78 | The first item that can be noticed from the above chart is that these companies underperformed the S 500 significantly during the past twelve months (Sommer). This lag is not indicative of a turning point. The poor performance reflects high unemployment and consumer uncertainty.
The consumer is being more selective in its discretionary spending and seeking alternate, cheaper products. The market seems to reflect this understanding. The high dividend yields provide a measure of support to these stock prices but they also reflect the lack of price appreciation. | Ticker |Company |EPS TTM |2011 EPS |2012 EPS |FCF TTM |Payout Ratio| | | | |(Est. ) |(Est. ) | | | |AVP |Avon Products, Inc. |2. 28 |2. 01 |2. 26 |-0. 03 |38. 0 | |CPB |Campbell Soup Company |2. 36 |2. 43 |2. 53 |1. 15 |47. 50 | |CLX |Clorox Company, The |5. 25 |3. 94 |4. 43 |2. 00 |41. 00 | |CCE |Coca-Cola Enterprises Inc. |2. 05 |2. 04 |2. 26 |1. 44 |5. 90 | |CL |Colgate-Palmolive Company |4. 46 |5. 05 |5. 50 |2. 98 |45. 50 | |GIS |General Mills, Inc. |2. 51 |2. 48 |2. 68 |0. 60 |41. 80 | |K |Kellogg Company |5. 6 |3. 47 |3. 78 |-0. 17 |30. 20 | |TAP |Molson Coors Brewing Company |3. 81 |3. 78 |4. 04 |1. 98 |28. 30 | |PEP |PepsiCo, Inc. |3. 97 |4. 48 |4. 90 |3. 21 |47. 60 | |PG |Procter & Gamble Company, The |3. 84 |3. 97 |4. 36 |3. 43 |49. 00 | Each of these companies reports solid earnings over that past twelve month period. Consensus analyst estimates for both the current year and next year are less impressive. We believe the estimates reflect expectations for continued weakness from stressed consumers” (Sommers). These companies are all overpriced and have no catalyst for change. The assumption that investors can find safety by identifying sectors or themes is a dangerous one. Avon recorded feeble operating performance in the fourth quarter of 2010. The company's earnings per share plunged 13. 2% to $0. 59 from $0. 68 per share in the year-ago period. The decline was principally due to reduction in operating margin, which resulted from unfavorable product mix, rising commodity cost and a 27% sales decline in Venezuela (Zachs).
Moreover, Avon ended fiscal 2010 with a long-term debt of $2,408. 6 million, reflecting a debt-to-capitalization ratio of 59%, which is substantially higher, and could negatively influence the company's credit worthiness and make it more vulnerable to the macro-economic factors and competitive pressures. Additionally, the North American market continues to remain sluggish with volume falling 14. 0% in the fourth quarter of 2010. Moreover, the company's initiatives to change the product mix and reposition the business in the U. S. arket will require significant expenditure to support increased advertising and promotional activities. This is likely to undermine Avon’s overall operating performance, moving forward. Besides, the company is expecting a mid single-digit revenue growth in fiscal 2011, which can be achieved through strong field programs coupled with an innovative. As well, call it luck; on November 08, 2010, Avon sold out its entire ownership interest (74. 67%) in Avon Japan to TPG Capital, otherwise the scenario could have been worse for the company due to the recent crisis in Japan product pipeline (Zachs).
Pulling out of the Japanese market was part of the company's 2010 decision to redouble its efforts in China. It announced the sale of its 75% stake in Avon Japan to private equity firm TPG for $90 million in late 2010. The move also was part of the beauty-products maker's plan to refocus on direct sales. (The Japanese unit typically generated more than half its revenues through direct mail. ) III. Industry Analysis (Personal Products – Cosmetics & Toiletries) Because of the wide arrange of products Avon offers, it is quite difficult to pin point one single industry.
Thus, going by their primary selling products, Avon fits most accurately into the Personal Products and Cosmetics & Toiletries industries. Companies that manufacture and/or market personal care products produce cosmetics, fragrances, and razors. The personal care products industry targets many faces - from chubby newborns to 40-something near-goddesses to those newly retired and dreaming of a beachfront condo. While companies in this sector would like to cater to everyone, the industry has found potential in both the Baby Boomers and their children -- the teens and 'tweens.
Called Gen Y, Boomer's teens offer an estimated $9 billion in purchasing power (Hoover’s). Leaving no demographic untouched, personal care products makers also are expanding their target markets across gender lines, marketing everything from cosmetics to hair care to men and teen boys, as well as women. With more US consumers reaching the age of 55 (33% by 2030), the industry has targeted this more-vain-than-not age segment and has logged revenue growth in skin care and hair coloring products throughout the past few years as a result.
On the other end of the spectrum, the teen girl population age 12 to 19 grew from 14. 3 million in 1995 to 15. 2 million in the US in 2001 (Hoover’s). Industry beauty companies, such as Avon Products, are targeting this demographic with lifestyle brands the likes of Avon's Mark. While women have historically been a target market -- primarily because women are the likely shoppers -- the buying power of males is not ignored by the personal care industry. In fact, the group's buying power is eagerly sought after.
Industry giants are tapping into the revenue potential of personal care products made specifically for men, illustrated by Procter & Gamble's acquisition of Gillette in October 2005 for some $57 billion (Hoover’s). Gillette represents more than razors. In the eyes of the industry, Gillette is the king of marketing to men. As the top marketer to women, Procter & Gamble has counted on its purchase of Gillette to give it the keys to the castle and enable it to become the voice to men, as well. Men offer revenue potential beyond Gillette's Mach3 and Colgate-Palmolive's Mennen brand.
A Newsweek magazine poll conducted in mid-2003 revealed that more than half of men age 35 to 55 are "somewhat" satisfied with their overall appearance. This percentage reflects an increase for this age segment since Newsweek's last poll in 1996. Companies have begun educating men on the topics of sunscreen, lotions, nail care, hair color, and more. Along the way, the personal care industry has been piquing the interest of the male customer and introducing him to the profitable skin care market, as Estee Lauder has with its Aramis and Clinique brands and Beiersdorf has with its Daily Protective lotion (formerly NIVEA for Men).
This trend still extends into 2008. Regardless of gender or age, customers access personal care products through a variety of venues, including grocery stores, drugstores, mass merchandisers, warehouse clubs, specialty retailers, and online e-tailers. Reports about personal care products sales for grocery stores and drugstores are usually prefaced with the phrase, "excluding Wal-Mart. " (Fidelity) This is a reminder that Wal-Mart Stores, as well as some warehouse clubs, present something of a wildcard to the industry.
Outside the brick and mortar, personal care products makers have a polished business model for using direct-selling methods to reach target markets. Cosmetics companies have gained sales advantages -- with little or no overhead -- by letting their customers sample products at home parties. Direct sellers, such as Avon Products, Mary Kay, and Amway, have long relied on this concept. UK-based natural personal care retailer The Body Shop has tested the US waters by selling through independent consultants and continues to sell in the US after seeing positive results.
No matter where a company in the personal care products industry identifies its untapped growth potential -- be it in the teenage girls or mid-life males markets -- a few of the same factors apply. Staying competitive means implementing innovation fueled by billions of dollars in R&D and a strategy of quick-to-market products. Reaching far and reaching fast are significant parts of the battle. However, expanding as wide as the tentacles of Wal-Mart and maintaining brand recognition and loyalty in a sea of private labels may prove to be the ultimate challenges. Fidelity) [pic] Competitors: Avon faces competition from a variety of products and product lines both nationally and globally. The beauty and beauty-related products industry is extremely competitive and the number of competitors and degree of competition in this industry varies extensively from country to country. Globally, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and against products sold through the mass market and prestige retail channels.
The major competitors of the company are L'Oreal SA (LRLCY. PK) and Revlon Inc. (NYSE: REV). Competition from mass merchandisers and specialty and department stores has spurred Avon to not only spend many millions on R&D but set aside just as much -- $100 million -- to support the launch of a global ad campaign. Avon anticipates driving additional growth based on fragrances (Today, Tomorrow, Always) and skin care (Anew anti-aging) sales. To that end, it signed on award-winning singer Fergie to develop a signature fragrance, which was unveiled in 2010.
Previous partnerships have involved French designer Emanuel Ungaro for two fragrances (U by Ungaro for Her and U by Ungaro for Him) and the New York Yankees' Derek Jeter for "Driven" men's fragrance and a personal grooming line of products. (Yahoo! Finance) [pic] Revlon (REV) is engaged in the production, marketing and selling of an array of cosmetics, hair color, beauty tools, anti-perspirants/deodorants, fragrances, skincare and other beauty care products. The company primarily operates in North America, Asia-Pacific, Europe, Africa, and Latin America. It is headquartered in New York City, New York and employs 4,800 people.
Revlon's global brand name, product quality and marketing experience have enabled it to create one of the strongest consumer brand franchises in the world. Revlon’s brand equity among the consumers enabled the company to garner 12. 7% of the US mass retail color cosmetics market; 9. 7% of the hair color market; 4. 6% of the perspirants/deodorants market; and 21% of the beauty tools market, during 2009 (Revlon). Strong brand image of the company facilitates customer recall and allows Revlon to penetrate new markets as well as consolidate its presence in the existing ones.
The company recorded revenues of $1,295. 9 million during the financial year ended December 2009 (FY2009), a decrease of 3. 8% as compared to 2008. The decline in revenues was driven by lower net sales of Revlon and Almay color cosmetics and some of the other beauty care products. The operating profit of the company was $170. 8 million in FY2009, an increase of 10. 2% over 2008. The net profit was $48. 8 million in FY2009, a decrease of 15. 7% as compared to 2008 (Revlon). L'Oreal (LRLCY. PK) is one of the largest cosmetic companies in the world.
It produces and markets a range of make-up, perfume, hair and skin care products in over 130 countries. It is headquartered in Clichy, France and employs 64,600 people. Since its inception about 100 years ago, the company has developed a strong brand portfolio of 23 international brands. The company's products are sold under well-known brands such as L'Oreal Paris, Garnier, Maybelline, SoftSheen Carson, CCB Paris, L'Oreal Professional, Kerastase, Redken, Matrix, Mizani, Lancome, Biotherm, Helena Rubinstein, Kiehl's, Shu Uemura,and Giorgio Armani.
These brands are available through a range of distribution channels ranging from mass market, to selective distribution including hair salons, pharmacies/drugstores and a network of directly owned stores and franchises. Strong brand portfolio lends better visibility and presence in all distribution channels and enables L’Oreal to reach a large customer base, thereby increasing its market penetration opportunities. L'Oreal operates through three business divisions: cosmetics, the Body Shop, and dermatology.
The Body Shop division operates a chain of 2,550 stores in 63 countries worldwide specializing in skin and hair care products made from natural ingredients. The company recorded revenues of E17,472. 6 million ($24,367. 8 million) during the financial year ended December 2009 (FY2009), a decrease of 0. 4% compared with 2008. The operating profit of the company was E2,577. 6 million ($3,594. 8 million) in FY2009, a decrease of 5. 4% compared with 2008. The net profit was E1,792. 2 million ($2,499. 5 million) in FY2009, a decrease of 8% compared with 2008 (L’oreal). (Fidelity) [pic] IV. SWOT Strengths |Weaknesses | | | | |Diverse geographic presence enhances |Chinese operations marred with controversy | |scale of operations and mitigates local market risks |and poor performance | | | | |Low cost business model of direct selling |Lack of clear-focus and strategy for non-beauty products | | | | |Strong brand equity |Declining operating margins | |Opportunities |Threats | | | | |Restructuring initiatives for organizational Competitive environment in the global | |Effectiveness |cosmetics industry | | | | |Re-branding strategy to drive consumer |Company’s revenues tied to the | |Demand |performance of the sales representatives | | | | |Emerging markets enhances the scope of |A diversified global operation exposes Avon to currency fluctuation | |growth for the Avon’s value cosmetic |risks | |products | | V.
Value Line Analysis On December 24, 2010, Jerome H. Kaplan, a Value Line analyst, points out that investors are not thrilled about Avon’s mediocre progress. The company’s stock price has declined in the last three months. Avon continues to struggle a bit in the U. S. and Chinese markets as is reflected in September-quarter earnings, as well as deteriorating growth in the vital markets of Brazil and Russia. Kaplan states, “Long-term emerging market-oriented investors should consider this untimely stock. Avon could be viewed as the equivalent of a diversified portfolio in fast-growing regions, such as Latin America, Asia, and Central and Eastern Europe. (Value Line) Improves margins, profits, and share price will most likely be a result of the growth of these markets by 2013-2015, in addition to savings of over one billion dollars by 2012-2013 from programs reducing Avon’s cost structure. When looking at the Value Line, we notice a Safety rating of 3. A Safety rating is another way to measure the company’s risk or financial strength. It is measured from 1 to 5, with 1 being the highest and best rating indicating the company has a less likely chance of becoming bankrupt and are less volatile. In Avon’s case, a 3 may be interpreted as being unpredictable. If the score is lowered to a 4 or 5, the greater the short-term price movements the stock may experience.
Safety ranks work better than Beta when there is a break in the market (when the market is going down). Arguably the most important investment recommendation found on Value Line is the Timeliness rating. The scale is also from 1 to 5 with again 1 being the most desirable rating which reflects the top 100 stocks within Value Line’s 1,700 stocks. Investors typically are encouraged to buy a portfolio of stocks across six or more industries with a ranking of 1 for Timeliness. After some time, investors are encouraged to keep an eye on this rating and when it falls to a 4 or 5 rating that stock should be sold, as is the case with Avon with a Timeliness rating of 4 (Money-Zine).
With a financial strength of a B++, Avon is considered a company that would most likely survive a depression. This means the company has sufficient liquidity to payout their dividends or increase how much they give as dividends. When income is the primary consideration, a strong balance sheet provides greater assurance that a dividend can be maintained (Valueline). Proper financing ensures stockholders that operations can be expanded without having to disperse a portion of the earnings to bank or bondholders. The stock price stability (SPS) is the standard deviation of weekly stock prices over the last five years. It is ranked from 5 to 100 and in increments of 5.
A ranking of 100 reflects the lowest standard deviation, which reflects the greatest stability attainable, while 5 indicated the largest standard deviation and the least stability. Price stability along with the company’s financial strength rating determines a stock’s Safety ranking. Avon has a price stability of 75 which puts them not too far from the top and would be considered to be on the lower side of good stability. The price growth persistency (PGP) of a stock is measured in the same format as the stock price stability. A stock that is 100 probably beat the index every year of the last 10 years. Avon’s PGP rating is 45, which is on the low side of average.
This measurement rewards this fund for the consistency with which it outperforms the broader universe if equity offerings over an extended period of time. Earnings predictability for Avon is 65. This rating provides a measure of the reliability of an earnings forecast. Ratings with a 100 are noted as the “best fit” on the regression line, meaning they have a high consistency of earnings. Predictability is based upon the stability of year-to year comparisons, with recent years being weighted more heavily than earlier ones. Reliable forecasts are close to 100 and the least are close to lowest of 5. Being that Avon falls around the middle of these two extremes, it can be said that the company is somewhat reliable and other factors should be considered in conjunction.
A stock's beta is a measure of a particular stock's price volatility and risk relative to a broader measure of stock price movements such as a market index (Money-Zine). Many stock beta calculations are performed relative to the S 500; however, the Value Line Beta calculation uses the New York Stock Exchange Composite Index. The most important fact to point out is that the beta measures a stock’s movement in price. If a stock has a beta of 1. 0 or above, which is the value of the market beta, it will experience more movement either up or down relative to the index. In comparison, a stock with a beta of less than 1. 0 is considered less risky and stable with smaller price fluctuations. According to Value Line, Avon has a beta of . 5 right under the market beta, which implies that this stock is not risky and will most likely not experience any drastic changes in its price. The Technical ranking of a stock is almost similar to that of its Timeliness ranking except for the fact that the Technical ranking does not take into consideration earnings per share projections, only the opportunity for a stock’s price appreciation. With a Technical ranking of 2, Avon, according to Value Line, should be purchased since this rating indicates Avon has short-term capital gains, in the three to six month timeframe (Money-Zine). The plowback method is sometimes used to calculate a company’s earnings after dividends have been paid out.
A high rate indicates that a company pays less in dividends and thus reinvests more of its earnings into the company. Investors tend to prefer a lower plowback ratio in a slow-growing company and a higher one in a fast-growing company. Whether or not this is desirable depends on the rate of growth. The plowback rate is calculated using the following formula: ROE x (1 – Payout Ratio (Dividends per share/Earnings per share)). Plugging in the Value Line figures for Avon the result is, . 492 x (1 – (. 84/1. 45)) = . 207 = 20. 7%. To calculate Avon’s free cash flow we need the following = per share earnings + cash flow from operations – required dividends – capital spending. Thus, 1. 45 + . 44 - . 84 - . 69 = $0. 36. VI. Ratio Analysis Profitability |12/31/2010 | |12/31/2009 | |12/31/2008 | |12/31/2007 | |Ratios | | | | | | | | |2006 |5. 5 | |1. 75 | |6. 26 | |60. 28 | |2007 |5. 4 | |1. 81 | |7. 23 | |70. 67 | |2008 |8. 3 | |1. 81 | |8. 38 | |125. 92 | |2009 |6. 1 | |1. 61 | |6. 4 | |64. 27 | |2010 |5. 9 | |1. 48 | |4. 74 | |41. 4 | According to this DuPont Analysis for Avon, all three sectors show inconsistencies and overall fluctuations up and down. In 2008, the company is at its highest level but dramatically goes down in all sectors the year following and continues to decline. Overall, efficiency in all sectors are not very stable. The company has had its off and on days throughout the years without any trend or consistency. Avon needs to control their operations and cost efficiency more closely. VII.
Regression & Descriptive Statistics – Growth Analysis Using the data figures for Avon provided through Value Line from 2002 to 2009, a descriptive analysis and linear regression were produced for SPS, Shares, EPS, CF, DIV, ROE, PE, BV, FCF, OM, RTC and NPM (Appendix). A more comprehensive analysis was done for EPS, FCF, PE, and ROE. Included in each financial variable analysis is the calculation of normalized data points for the 7th and 8th periods, which are years 2008 and 2009, respectively. Within this additional analysis the Current to Normalized (CNE) was also calculated, and each resulting figure was compared to the normal expected range of . 85 – 1. 15.
In the last step of this additional analysis, growth rate and variability figures were also produced. *Please Note: the ROE figures for the years of 2002, 2003, 2005, and 2008 were noted as “NMF” on Value Line, thus the figures used in the analysis were calculated using the net income after tax from the income statement and the shareholder’s equity from the balance sheet. Looking at the summary of the results for these four financial variables in the chart given below, only the CNE of EPS, which is . 93 falls within the normal range of . 85 – 1. 15, which means that in the remaining three areas of FCF, PE, and ROE, Avon is operating below the expected and acceptable range.
These below average results signify that the normalized points produced are not adequate enough to rely on to calculate appropriate growth rates. As can be seen also in the summary, there is a positive growth rate in both EPS and ROE, but negative in both FCF and PE. ROE may be at a significant high growth rate because of the out of norm results that were calculated for the years of 2002, 2003, 2005, and 2008 as mentioned above. In each of these particular years, shareholders equity was low in comparison to net income (negative in 2002) which resulted in abnormal figures Value Line did not wish to indicate. FCF has a negative growth rate since in 2005 it was at an unsustainable figure of 1. 07 and then drastically declined to . 34 the following year and even lower to . 25 in 2007.
This drastic change coupled with another fluctuating high and low between 2008 and 2009 are factors for this negative growth rate. In relation, although not as drastic, for PE results more visibly decline in the last two periods of 2008 and 2009. |Avon Products, Inc Financial Variables Analysis | | | |EPS |ROE |FCF |PE | |Normalized 8th Period | |$1. 55 |$156. 38 |$0. 46 |$22. 18 | | | | | | | | |Normalized 7th Period | |$1. 51 |$121. 35 |$0. 52 |$22. 7 | | | | | | | | |Current to Normalized | |0. 93 |0. 31 |0. 79 |0. 84 | | | | | | | | |Growth Rate | |3. 09% |28. 87% |-12. 80% |-0. 88% | Another aspect of the descriptive and regression analysis that is important to point out are the R-squared and skewness. R-squared, also known as the coefficient of variation, is helpful in providing a measure of how well future outcomes are likely to be predicted by the model.
The values for R-squared range from 0 to 1: the closer to 1 the results are, the better the “fit’ of the predicted values and the more realistic or reliable they are. R-squared can also be explained as the strength of the relationship between time and the variable. For all four financial variables, the R-squared figures range from . 01-. 25, which are indicative of weak relationships between time and each of these variables. None of the data points for these variables are strong measures of how well the regression line approximates the real data points. Skewness is a measure of the asymmetry of the probability distribution of a real-valued variable (Wikipedia. com). The results are usually either positive or negative, or in some instances undefined.
A negative skew in characterized and having the mass distribution concentrated on the right of the figure or in most recent years and has relatively few low values. A positive skew has a mass distribution concentrated on the left o the figure or in earlier years and has relatively few high values. For both EPS and PE, the skewness is positive in contrast to ROE and FCF which are both negative. Growth for EPS and PE both took place in recent years while growth for ROE and FCF took place in earlier years. |Avon Products, Inc Financial Variables Analysis | | | |EPS |ROE |FCF |PE | |R-Squared | |0. 1041 |0. 2092 |0. 2527 |0. 101 | | | | | | | | |Skewness | |1. 0284 |-2. 5446 |-0. 3754 |0. 8432 | For the remaining financial variables, the same analysis was produced. Interestingly enough, the CNE for these variables fall within the normal expected range of . 85 – 1. 15, except for BV which is slightly over at 1. 18. These figures range from . 91 – 1. 04. The growth rates for DIV, CF, BV and SPS are positive, but are negative for Shares, OM, NPM and RTC. The negative growth rate of Shares means that the company is buying back their stock. For R-squared the only strong relationships between time and that variable were DIV at . 584, Shares at . 8963 and SPS at . 9632. The R-squares for BV and RTC are relatively moderate. Skewness for DIV, BV, OM and NPM are negative with growth occurring in earlier prior years and skewness for CF, Shares, SPS and RTC were positive with growth occurring in the latter years. |Avon Products, Inc Financial Variables Analysis | | | | | |EPS 2009 |1. 45 | | | | | |Growth Rate = |3. 9% | | | | | |Payout Ratio = |36% | | | | | |Discount Rate = |7. 10% | | | | |Avon Projections 2010-2019 | | |Period |Years |EPS |DIV |PV | |1 |2010 |1. 49 |0. 54 |$0. 50 | |2 |2011 |1. 54 |0. 55 |$0. 48 | |3 |2012 |1. 59 |0. 57 |$0. 47 | |4 |2013 |1. 64 |0. 59 |$0. 45 | |5 |2014 |1. 69 |0. 61 |$0. 3 | |6 |2015 |1. 74 |0. 63 |$0. 42 | |7 |2016 |1. 79 |0. 65 |$0. 40 | |8 |2017 |1. 85 |0. 67 |$0. 38 | |9 |2018 |1. 91 |0. 69 |$0. 37 | |10 |2019 |1. 97 |0. 71 |$0. 36 | |PV total of dividend payout for the next 10 years: |$4. 26 | Terminal Value The 2019 stock price calculated reflects the value of all future dividends or cash flows in perpetuity.
In order to determine the 2019 stock price the following will be needed: Because when using the above process the discount rate is assumed and one of the biggest variables that may fluctuate and thus cause the result to differ, other methods should also be considered when doing a company stock price valuation. One other such popular method is the Capital Asset Pricing Model (CAPM). Capital Asset Pricing Model (CAPM) The main purpose of this model is to explain the relationship between risk and the expected return that a stock may yield and is used in the pricing of risky securities (Investopedia). The following formula is used in the calculation of CAPM: o CAPM = Rf + (a (Rm - Rf) Rf = Risk-free rate (Treasury bond rate) assumed at 5% o Rm = Expected market return assumed at 12% o (a = Beta of the security; from Avon’s Value Line beta is . 95 Thus, when using this CAPM formula to calculate the discount rate, the following result is returned: CAPM = . 05 + . 95 (. 12 - . 05) = . 1165 = 11. 65% discount rate (Ke). This new discount rate of 11. 65% is now inputted into the dividends projections table done previously. The new table is shown below with a PV total of dividend payout for the next 10 years now at a reduced amount of $3. 45. The new terminal value also decreases to $16. 87 as well as the PV of this 2019 stock price to $5. 60.
The stock remains overvalued with an intrinsic value of $9. 06 compared to the current price of $29. 22. The price-to-intrinsic is now 3. 23. |Variables used to determine PV total of dividend payout for the next 10 years: | | | |EPS 2009 |1. 45 | | | | | | |Growth Rate = |3. 09% | | | | | | |Payout Ratio = |36% | | | | | | |Discount Rate = |11. 5% | | | | | | | | | | | | | | |Avon Projections 2010-2019 | | | | |Period |Years |EPS |DIV |PV | | | |2 |2011 |1. 54 |0. 55 |$0. 45 | | | |3 |2012 |1. 59 |0. 57 |$0. 41 | | | |4 |2013 |1. 64 |0. 59 |$0. 38 | | | |5 |2014 |1. 69 |0. 61 |$0. 35 | | | |6 |2015 |1. 4 |0. 63 |$0. 32 | | | |7 |2016 |1. 79 |0. 65 |$0. 30 | | | |8 |2017 |1. 85 |0. 67 |$0. 28 | | | |9 |2018 |1. 91 |0. 69 |$0. 25 | | | |10 |2019 |1. 97 |0. 71 |$0. 24 | | | |PV total of dividend payout for the next 10 years: |$3. 45 | |
The only way that Avon stock would be considered undervalued would be at a discount rate of about 4. 9% or below as shown in the table below. |Variables used to determine PV total of dividend payout for the next 10 years: | | | |EPS 2009 |1. 45 | | | | | | |Growth Rate = |3. 09% | | | | | | |Payout Ratio = |36% | | | | | | |Discount Rate = |4. 0% | | | | | | | | | | | | | | |Avon Projections 2010-2019 | | | | |Period |Years |EPS |DIV |PV | | | |2 |2011 |1. 54 |0. 55 |$0. 50 | | | |3 |2012 |1. 59 |0. 57 |$0. 50 | | | |4 |2013 |1. 64 |0. 59 |$0. 9 | | | |5 |2014 |1. 69 |0. 61 |$0. 48 | | | |6 |2015 |1. 74 |0. 63 |$0. 47 | | | |7 |2016 |1. 79 |0. 65 |$0. 46 | | | |8 |2017 |1. 85 |0. 67 |$0. 45 | | | |9 |2018 |1. 91 |0. 69 |$0. 45 | | | |10 |2019 |1. 7 |0. 71 |$0. 44 | | | |PV total of dividend payout for the next 10 years: |$4. 75 | | X. Rule #1 The Four M’s • Meaning • Moat • Management • Margin of Safety (Sticker Price) Does the business have meaning to you? Since my tender age of 4, I remember going door-to-door with my mother distributing Avon brochures and samples. Not only was she a single mother at the time, but she also went to school and worked another part-time job. My mother eventually left her part-time job and made Avon her full-time career. She now has 25 years of selling Avon and making a living out of it.
My step-father also quit his full-time job and dedicated his time to helping my mother out with the business. My whole life I have seen my mother work her hardest to give me anything and everything she could to raise me and get me to where I am now and she could not have accomplished that if it weren’t for her loyal commitment to Avon Products. She built her business from the bottom up just like any other Avon representative. She now works from home and has all her clients come to her. My mother has always told me that she eventually wants to hand over the business to me and I have taken this opportunity in Finance class to learn more in-depth about the company and what it offers not only as a business owner but also as an investor.
Ironically enough, just about a month ago my mother showed interest in investing in the company (yes, after 25 years! ) and asked me about whether she should and if so how much she should invest. This evaluation project gave me even more reason to choose Avon Products, Inc as my chosen company of interest. Does the business have a wide Moat? Or in other words, is the company’s future predictable? Avon has been in existence almost 100 years, 95 to be exact. It has had an exciting development from start to present going from being solely in the perfume/cosmetics market to expanding their products to include an array interests from kids toys to men’s sports watches.
They have captured a competitive advantage from the beginning starting off as the first to introduce direct selling and now being a well renown beauty global entity; they have indeed establishes a good name for themselves. Avon continues to do extensive research to keep up to par with their different markets and products and continuously strives to improve what they already have and produce new products. Many companies have hence since followed in Avon’s footsteps, realizing the success Avon has had with focusing on interpersonal sales and customer service. Avon has a well-established name and reputation and many customers have been loyal since their early years. The Management Ever since the beginning up until 2001, Avon has had male CEO’s.
Some find that a bit peculiar being that Avon prides itself on being “the Company for Women”. Let’s keep in mind though the history of this company as mentioned in the first part, Avon was created by a man by accident perhaps, but definitely with good intentions. As of 2001, the new CEO, Andrea Jung, has brought new hope and meaning to the company. Since her leadership started the company has revolutionized into a new identity with Representatives truly feeling and living the motto of the company. Both customers and Representatives have more confidence in the company and it has portrayed overall both in the financial and operational functions of the company. Safety of Margin (Sticker Price)
On Rule #1’s website www. ruleoneinvestor. com, Phil Town, provides various calculators that aid in the decision to buy or not buy a particular stock by inputting various company figures to produce the company’s true value. Step 1 Data Input: Current EPS: 1. 45 # Years: 10 EPS Growth Rate: 13% Step 1 Result: Future EPS = $4. 92 Step 2 Calculate Future Value Data Input: Future EPS: $4. 92 Future PE: 18 Step 2 Results: Future Value = $88. 56 Step 3 Calculate Sticker Price Data Input: Future Value/Share: $88. 56 Min Acceptable ROI: 15% # Years: 10 Step 3 Results: Sticker Price: $21. 89 Step 4 Calculate Margin of Safety Data Input: Sticker Price: $21. 89 Step 4 Results:
Margin of Safety: $10. 95 Overall Results: $21. 89 ; $29. 22 (Current Price) = Stock is Overvalued = Sell/Not Buy XI. Conclusions /Final Stock Judgment Based on all the analysis previously set forth here, the best recommendation for an investor would be not to buy Avon stock or to sell their Avon stock if they currently hold interest in the company. Finding that the intrinsic value of the company using two separate methods (AAA bond rate & CAPM) both return a valuation that Avon’s current stock price is undervalued, would understandably be sufficient to determine that it would not be the best of choices to invest in the company; at least for the current time.
The difficulty as well in trying to formulate a regression analysis for ROE also points to the company’s weaknesses since shareholder’s equity has not shown a constant, positive performance and even at times negative. Income generation for stockholders is not quite strong and would require further, long-term watch if an investor has a personal interest in the company to be able to invest at a later time when the value of the current stock is really what it is worth. Furthermore, recent news indicates it is not the greatest time for Avon in terms of earnings as they have spent a great deal on advertising. Getting out of the Japanese market may have been the most perfectly timed move they have made.
Although Avon is currently not seen as one of the strongest companies to invest in at the moment, reviews have said not to leave Avon behind for the future. They are slowly regaining momentum and being that their beta of . 95 is still below the market’s beta of 1. 0, it is not one of the riskiest out there. Also, it must be reminded that with a good Technical ranking of 2, Avon has short-term capital gains, in the three to six month timeframe. At a financial strength of a B++, the company is still in good shape and can most likely survive a depression better than other companies. The company has sufficient liquidity to payout their dividends or increase how much they give as dividends.
Investors should still proceed with caution if even in the future the company still maintains a Safety rating of 3 and a Timeliness rating of 4 as these ratings do not give the company enough leverage to be deemed financially reliable. In addition, with a Price Growth Predictability (PGP) of 45, Stock Price Stability (SPS) of 75, and an Earnings Predictability of 65, the company does not perform more than average in all of these areas meaning they don’t really beat the index, they are somewhat stable, and they have an average consistency of earnings. Overall, all of the above inconsistencies and especially the overvalue of the current stock price, will not lead to satisfactory returns.
Perhaps in the near future the tables will turn as the company does have many opportunities and room for slow growth, but it will require a watchful eye. Avon is a trusted company with a rich history, especially among women, so there is much possibility of vast improvement and capabilities of big interest to investors if the company is more observant with their financial movement and take care of their shareholders. XII. References Avon Products, Inc. Avon. com. 2011. 2 April 2011 Datamonitor. Business Source Premier. 7 June 2010. 3 April 2011 Fidelity. Fidelity. com. 2011. 8 April 2011 Hoover’s Inc. LexisNexis Academic. 8 April 2011. 8 April 2011 Investment Underground. Seeking Alpha. 21 March 2011. 2 April 2011
Investopedia. Investopedia. com. 2011. 6 April 2011 Kaplan, Jerome H. Value Line. 2011. 2 April 2011 L’Oreal. Loreal. com. 2011. 6 April 2011 Money-Zine. Money-Zine. com. 2011. 4 April 2011 Revlon. Revlon. com. 2011. 6 April 2011 Roberts, Andrew. Bloomberg. 17 March 2011. 2 April 2011 Sommer, Ron. Seeking Alpha. 21 March 2011. 2 April 2011 Town, Phil. Rule #1: The Simple Strategy for Successful Investing in only 15 Minutes a Week. 2011. 9 April 2011 Wikipedia. Wikipedia. com. 2011. 6 April 2011 Zachs. Yahoo! Finance. 16 March 2011. 2 April 2011 XIII. Appendix [pic][pic] [pic] ----------------------- Corporate Valuation: Avon Products, Inc. (NYSE:AVP) F