This Cosmetics Business is Cheap With High Insider Ownership

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors of Revlon (NYSE: REV) must be quite happy as the company has gained as much as 34.9% since the beginning of the year. The company is in the portfolios of several famous investors, including Joel Greenblatt and Jim Simons. Interestingly, being the shareholders of Revlon means investors can invest alongside billionaire Ronald Perelman. He owns 76.3% of the total A shares and 100% of the company’s B shares. Should investors buy Revlon shares at its current trading price? Let’s find out.

Positive cash flow but weak balance sheet

Revlon is the manufacturer of various cosmetics, beauty tools, deodorants and fragrance products under several brand names, including Revlon, Almay, SinfulColors and Pure Ice. Revlon concentrates its business in the U.S., generating nearly $800 million in revenue in 2012. The Asia Pacific region ranks second at nearly $240 million.

For the past four years, Revlon managed to produce consistently increasing revenue, from $1.3 billion in 2009 to nearly $1.43 billion in 2012. However, the net income has fluctuated wildly in the same period, in the range of $49 million to $327 million. In 2012, its net income came in at $51 million. The high net income in 2010 was mainly due to more than $247 million benefit from provision for income taxes. In 2012, it generated $104 million in operating income and $83 million in free cash flow.

What makes me worry is its weak balance sheet position. As of March 2013, it had negative equity of $(655) million, $121 million in cash and as much as $1.23 billion in long-term debt. Revlon is trading at $19.50 per share, with the total market cap of $1 billion. The market does not value Revlon expensively, at more than 9 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

The cheapest valued among its peers

However, compared to its peers Coty (NYSE: COTY) and Avon Products (NYSE: AVP), Revlon seems to be relatively cheaply valued. Coty is trading at $17 per share, with the total market cap of $6.5 billion. The market values Coty at much higher valuation, at 12.5 times its trailing EBITDA. Like Revlon, Coty also had highly leveraged balance sheet. It had $869 million in equity, nearly $610 million and cash and more than $2.46 billion in debt. Avon also employed a lot of debt in its operations. The company booked nearly $1.18 billion in equity, nearly $1.49 billion in cash, and more than $3.63 billion in debt. Avon also has higher valuation than Revlon. At $20.80 per share, Avon is worth around $9 billion. Avon is valued at around 12.1 times its trailing EBITDA.

Coty, with the financing support from Berkshire Hathaway, once placed a $10.7 billion bid for Avon to expand its footprint in the international market, along with its increasing presence in several emerging markets such as Brazil and China. Moreover, Coty hopes to take advantage of R&D and distribution capabilities of Avon. Nevertheless, Coty withdrew the offer due to Avon’s no response. In the next 2-4 years, Avon could earn around $1.50-$1.75 per share, thanks to the ongoing cost-cutting program under the leadership of the new CEO Sheri McCoy. Among the three companies, only Avon pays dividend with the yield at 1%. Neither Coty nor Revlon offer investors dividends.

My Foolish take

Indeed, Revlon could be a good buy for investors at its current trading price due to its great global franchise, relatively low valuation compared to its peers and high insider ownership. If Revlon is valued at the EBITDA multiple of 12, it could be worth around $26 per share. According to Barron’s, Chris Mittleman, Mittleman Brothers’ chief investment officer, estimated that Revlon could be worth $30 per share, or $40 per share in a buyout deal.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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