In a previous article, I talked about PNC Financial Services (NYSE:PNC), a financial services firm that Brian Rogers, chairman and chief investment officer of T. Rowe Price, recommended at the 2013 Barron’s Roundtable. In this article, I will focus on another stock that he liked: Avon Products, Inc. (NYSE:AVP), the direct selling company with beauty and fashion-related products.
2012 Losses With High Amount of Debt
Avon, incorporated in 1916, is a global manufacturing and direct selling company in 65 countries and territories with three main product categories: Beauty (cosmetics, fragrances, skin care), Fashion (watches, jewelry, accessories) and Home (decorative products, housewares). The majority of Avon’s revenue, $7.64 billion, or 71.4% of the total revenue, was generated from the Beauty category. The Fashion category ranked second with $1.89 billion in revenue in 2012, while the Home category generated more than $1 billion in 2012 revenue. In terms of geography sales, Avon seemed to be quite strong in Latin America, with nearly $5 billion in 2012 sales. Europe, Middle East & Africa ranked second with $2.9 billion in sales.
In the full year 2012, the total revenue decreased by 5% to $10.7 billion. The operating profit experienced a significant decrease of 63% to $315 million. However, Avon generated losses of $42.5 million, or a loss of $0.10 per share. At first glance, investors might be scared of Avon’s high level of debt compared to its equity. As of December 2012, Avon Products, Inc. (NYSE:AVP) had $1.23 billion in total stockholders’ equity, $1.2 billion in cash, and nearly $3.2 billion in short and long-term debt. However, the low equity base was due to the fact that Avon has bought back a significant amount of its own shares over time. The treasury stock has reached $4.57 billion in December 2012.
$25 Per Share in the Next Two Years
Five years ago, Avon traded at around $40-$50 per share. At this time of writing, the company is trading at nearly $20.50 per share. At the beginning of 2012, Coty, a French beauty products maker, offered to acquire Avon at around $23.25 per share. Several months later, Coty made a second offer of $24.75 per share, valuing Avon at $10.7 billion. What makes Coty interested in Avon was Avon’s distribution abilities and good product R&D. However, as there was no response from Avon, Coty withdrew its bid. Brian Rogers thought that in a friendly transaction, Avon could have gotten a $25 - $26 per share offer. He was betting on Avon’s new CEO, Sheri McCoy, who had been working for Johnson & Johnson for 30 years. McCoy has already launched a big cost-cutting program to get the profit margin back to historical levels. Thus, it might earn $1.50 - $1.75 per share in the period of 2-4 years. If a consumer-products multiple was applied to Avon, Rogers thought Avon’s share price might reach $25 in two years.