Revamp Your Portfolio With Beauty
Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Avon (NYSE: AVP), the manufacturer and direct seller of beauty, fashion and home products, might just be the right stock to add zing to your portfolio. It is the fifth-largest beauty company and largest direct selling enterprise in the world, with 6.4 million representatives. Yes the general consensus is negative for Avon because of the sliding profits, 4 year pending legal probe, and some not so good business strategies by its management which are primarily the reasons for its price plunging from the $30-$31 levels to $14.07 in just a year, but most of these problems are temporary and fixable. Besides, Avon boasts a global brand with a chuck load of market share in emerging markets.
The Benefit of Direct Selling.
While the majority of Avon's competitors distribute their products to resellers such as department stores, drugstores, or cosmetic stores, Avon sells its products solely through its direct-selling channel of independently-contracted Active Sales Representatives and through its online website. Direct selling may feel outdated in the U.S., but the channel remains hot in emerging markets like Brazil. Direct selling grew about 30% between 2006 and 2011 into a $136 billion global market. Doesn’t seems like a big deal? Well, IT IS! With sales in over 100 countries many of which do not have the desired retail infrastructure, Avon’s 6.5 million sales force is its biggest advantage over its competitors.
Avon is taking the necessary steps to cut its cost and improve profit margins. This past week Avon unveiled plans to cut about 1,500 jobs and exit two underperforming markets, South Korea and Vietnam, as a step toward the goal of cutting costs by $400 million over three years. The management also hinted at aiming to improve profit margins to over 7.5% in two years compared to 4% last quarter. If they succeed then their EPS may rise to $1.64 compared to an estimated 60 cents this year. Avon is profitable as an overall company with sales rising by 1% last quarter. As of Sept. 30, it reported $4 billion in current assets, including $1.1 billion in cash and equivalents, comfortably ahead of $2.8 billion in short-term liabilities which will help Avon pass through these turbulent times.
Another reason why Avon is a better buy than its competitors is because its total equity and net debt is equal to $8.5 billion, or just 0.8 times annual revenue, according to market measures. Among Avon's competitors, Revlon’s (NYSE: REV) stock and debt are valued at about 1.5 times annual revenue, Estée Lauder's (NYSE: EL) at about 2.4 times and Procter & Gamble's (NYSE: PG) at 2.6 times revenue.
A few months ago, Coty offered to buy out the company for $24.75 a share, which was nearly 20 percent above Avon’s stock price at the time. The board declined the offer. Coty’s offer is a good hint towards the supremacy of Avon. Who knows, Coty might be coming around with another attractive offer? Well, when it does then this beauty giant will surely add oomph to your portfolio.
The beauty industry continues to expand globally, with some projections claiming 8.5% growth by 2014; revenue growth in 2010 is estimated at 3.3%. Several trends support this expansion and promise continued profitability into the future. Also with the holiday season in hand, which generally cause a sales peak, it will be a wise decision to add Avon to your portfolio. Yes it is a bit risky, but at current price the risk reward ratio favors long investors.
So this holiday season while you loosen up your purse, decorate your house, bake some cookies, have fun with Santa, go on exotic vacations and pamper yourself with some goodies, its time you give your portfolio and little makeover with Avon products.
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