Avon Products Inc. (AVP, Financial) is a $1.64 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.
Strategic alternatives
The company faces stiff competition so the firm is taking actions to maintain its position and its financial performance. These activities include cutting costs, or leaving markets or only moving some segment products. Despite the efforts, it is not sure that Avon will generate excess gains. An example of intense competition is Brazil, where the firm has about one-fifth of its sales.
Looking at its cost structure, the efforts were made to achieve efficiencies to generate about $350 million in costs ($200 million from its supply chain and $150 million in operating expenses). Moreover, Avon plans to eliminate 2,500 positions. These are key strategic actions because the firm is facing a revenue decline. In the next table, we can appreciate the evolution in a 10-year period of its revenues per share, and we can see it has been in decline for the past years.
| Year Ended | Dec06 | Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 | Dec13 | Dec14 | Dec15 |
| Revenues per Share | 19.32 | 22.75 | 24.89 | 24.23 | 25.18 | 26.13 | 24.81 | 22.97 | 20.37 | 14.16 |
The revenue has been in decline for the last five years as well as the operating margin. The average rate of decline per year is -18.9%.
Bulls and bears
Jim Simons (Trades, Portfolio) increased his position in the stock by 316% to 1,833,600 shares in the company's latest filing. In the same line, but not so bullish was Charles Brandes (Trades, Portfolio), who increased the position by 10% to 156,848 shares. On the other hand, Donald Yacktman (Trades, Portfolio) remains bearish on the company as evidenced by the decreased position in the company's shares by 20% to 28.14 million shares. A less bearish sentiment was demonstrated by Wallace Weitz (Trades, Portfolio), who reduced the position by 18% to 5.78 million shares. Richard Snow (Trades, Portfolio) left the investment entirely; he sold out the stock by the end of the first quarter.
Price performance
The stock plummeted 7.2% on a year-to-date basis and about 46% in the past 12 months, so it is a good entry point. According to Yahoo! (YHOO, Financial) Finance, the estimated one-year target share price is $4.82, so if you buy shares at Tuesday's market price ($3.78), your return from price appreciation would be 28.2%. Also, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 24 cents at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on investment for a stock, and in this case is 6.3%. So the total expected return for investing in Avon is 34.2%, an attractive stock performance.
Final comment
The company’s business model is facing changes with a focus on compensation and training. Regarding valuation, the stock sells at a forward P/E ratio for today of 12.61, while the price-to-sales ratio of 0.3x is below the industry median of 0.95x. This a good opportunity to buy it now with a dividend yield that is considered high. Further, Avon has an excellent upside potential by analyst´s estimates.
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