One Multi Level Marketer Is On A Tear

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

Despite the turmoil surrounding multi-level marketing companies, with billionaire Bill Ackman launching an offensive against HerbalifeAvon (NYSE: AVP) saw its stock up 20% after its earnings announcement. Avon investors took the numbers as “stabilizing” and a sign that restructuring might be taking hold for the company, but is it too rich for investors to buy in now? I wouldn't go that far (read more about the earnings over reaction). 

Multi-level marketing companies have been under pressure of late thanks to Ackman's Herbalife accusations. With Herbalife in the spotlight, new speculation has arisen concerning Nu Skin. The accusations of Nu Skin (NYSE: NUS) as a pyramid scheme goes back to the early nineties.  However, fellow MLM company Avon has not seen as much pressure as Herbalife and Nu Skin. Both are still down over 8% since Ackman's attack on Herbalife--Avon, meanwhile, is up over 40%. 

<img src="" />

Avon managed to report EPS of $0.37 per share versus consensus of $0.27. This is well above the flat earnings per share the company posted for the same quarter a year ago. For its top market, Brazil, revenue rose 10%, but for its fastest growing market, Asia, revenue rose a mere 3%.

Fellow beauty products company Nu Skin has also managed to post solid results for its latest quarter, posting EPS of $0.97, compared to $0.76 for the same quarter last year, and above consensus of $0.96. The company also upped its revenue guidance by $50 million to between $2.3 billion and $2.35 billion. 

The unfavorable product mix for both Nu Skin and Avon should put pressure on the companies going forward. Also, weak discretionary spending will pressure the stocks. Avon's management has outlined unexciting growth expectations for the company, with revenue expected to come in at mid-single digit growth, and a low double-digit operating margin over the next three years. The company also cut its quarterly dividend by $0.06 per share to $0.23 per share, dropping its dividend payment and lowering its yield from over 4% to a mere 1.15%. 

Avon has been seeing pressures from various products and product lines, where competition is fierce in the niche beauty products market. Pressures include those from Estee Lauder (NYSE: EL) and Revlon (NYSE: REV), whose products are sold through direct-sales companies, as well as internet and mass-market retail channels. Both of these companies have posted better than expected earnings results. 

Estee Lauder posted last quarter earnings of $1.16 per share, which were up 15% from the prior-year quarter, and ahead of the management guidance range of $0.97-$1.03. Estee also owns brands that includes MAC, Bobbi Brown and Clinique.

Revlon's last quarter earnings were up 28% from the same quarter last year. Revlon's brands includes Almay, Pure Ice, Charlie and Mitchum. Driving Revlon has been sales growth of 14% for the U.S. segment and 15% for Latin America. Revlon is up over 40% year to date already, whereas Avon is up almost 30% over the same time period. 


Given the fundamental differences of the business models, the peer valuation does not mean much for investors, nor does a profitability or balance sheet comparison.  But let's look at how these companies compare on a straight growth basis:

<table> <tbody> <tr> <td colspan="1" rowspan="1"> <p><span> </span></p> </td> <td colspan="1" rowspan="1"> <p><strong>Avon</strong></p> </td> <td colspan="1" rowspan="1"> <p><strong>Estee Lauder</strong></p> </td> <td colspan="1" rowspan="1"> <p><strong>Revlon</strong></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><strong>5-Yr. Historical EPS Growth</strong></p> </td> <td colspan="1" rowspan="1"> <p><span>-39%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>14.80%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>26%</span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><strong>5-Yr. Historical Cash Flow Growth</strong></p> </td> <td colspan="1" rowspan="1"> <p><span>-42%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>12%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>81%</span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><strong>5-Yr. Expected EPS Growth</strong></p> </td> <td colspan="1" rowspan="1"> <p><span>8.80%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>13%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>5%</span></p> </td> </tr> </tbody> </table>

Don’t be fooled

The historical growth for Avon has been poor, and its future growth is mediocre at best. Avon's forward P/E of 23x also appears rather high, making the stock 'expensive' after its recent run up. The chart below shows that the 23x multiple is near historical highs. 

<img src="/media/images/user_15651/avon-pe_large.png" />

I would rather invest in beauty products that have a more diverse sales outlet, such as Estee Lauder. Estee is up only 5% year to date compared to the huge run ups by Avon and Revlon, but it does boast the best expected long-term growth rate.

mhargra 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!

blog comments powered by Disqus