In this article, let's take a look at Avon Products Inc. (AVP, Financial), a $3.43 billion market cap company, which is the world's leading direct marketer of cosmetics, toiletries, fashion jewelry and fragrances, with about 6 million sales representatives worldwide.
Largest Shareholders
Donald Yacktman (Trades, Portfolio)’s Yacktman Asset Management was the largest shareholder of Avon, holding 31.47 million shares, down by 42% from the previous quarter. The value of the stake amounted to $295.51 million. Another prominent investor with a large position in terms of value was Joel Greenblatt (Trades, Portfolio)’s Gotham Asset Management, with a position of 9.73 million shares, up by 83% from the previous quarter.
Underperforming Markets
Avon´s returns on invested capital were reduced consistently. Between 2005 and 2012, returns declined to 24% on average.
Other important point is the operations in the China, because it is not showing good results. We must mention that Avon was involved in regulatory problems, some allegations of bribery, and had to replace the principal executives. Perhaps the company could allocate those efforts in other regions with higher return.
In Brazil, the firm is losing ground due to an intense competition that complicates achieving good performance. This country is important because the South American country accounts for about 20% of total sales.
Avon continues to have the problem with its representatives. The reason why it is still deteriorating is that they do not always exclusively sell the company´s products.
Revenues, Margins and Profitability
Looking at profitability, revenue for the fourth quarter of fiscal 2015 was $23.41 million, a decrease of 12.24% compared to $26.67 million in the comparable period in fiscal 2013. This led earnings per share decreased in the fourth quarter compared to the same quarter a year ago (-$0.75 vs -$0.16). The net income has decreased by 379% when compared to the same quarter one year ago, to -$330.70 million from -$69.10 million.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AVP | Avon Products | -46.63 |
| EL | EsteeLauderCosInc | 29.88 |
| CL | Colgate-Palmolive Co | 131.66 |
| NUS | Nu Skin Enterprises Inc | 20.98 |
| Â | Industry Median | 8.49 |
The company has a current ROE of -46.63% which is lower than the industry median and the one exhibit by Nu Skin Enterprises (NUS, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Estee Lauder (EL, Financial) and Colgate-Palmolive (CL, Financial) could be more appropriate options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Dec 05 | 97.18 |
| Dec 06 | 60.28 |
| Dec 07 | 70.67 |
| Dec 08 | 126.26 |
| Dec 09 | 64.27 |
| Dec 10 | 41.40 |
| Dec 11 | 31.83 |
| Dec 12 | -3.05 |
| Dec 13 | -4.85 |
| Dec 14 | -55.52 |
The ratio has decreased when compared to its ROE from one year prior and also it showed a downward trend which we think is a major weakness.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 12.0x which indicates a premium versus the industry average of 2.55x while the price-to-sales ratio of 0.40x is below the industry average of 1.36x.
The stock price has a downward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $2,728, which is quite worrying. The share price has plummeted by almost 46.85% when compared to its closing price of one year ago. Further, the year to date (YTD) return for the stock is -15.44%.
Final Comment
As outlined in the article, there are several weaknesses that we think are important and worst of all it will take time to rebuild the brand. Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio) and David Dreman (Trades, Portfolio) opened new positions in the stock in the fourth quarter of 2014. The gurus bought 259,827, 69,500 and 47,066 shares respectively. On the other hand, Richard Snow (Trades, Portfolio) and NWQ Managers (Trades, Portfolio) have sold out the stock, while Mario Gabelli (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) have reduced their positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned
