A lot has been written about the slow pace of economic recovery
in the U.S. with unemployment levels at close to historical highs
at 9.4% (as of December 2010) set in contrast to the feverish
growth of emerging markets.It then comes as no surprise that most
of the big players in the beauty and personal care industry such as
), Estee Lauder (
), Revlon (
), Procter & Gamble (
(UL), Colgate (CL) and Kimberly Clark (KMB) are
increasing their presence in growing markets like China, India and
As double-digit growth rates in emerging economies seem more
attractive than their home markets in the U.S. and Western Europe,
these companies have the challenge of how to focus their resources.
And while all players can focus on growing in these markets, some
are better placed to exploit these than others.
But what does it mean for the average investor?
For an investor, a stock is worth its ability to put cash back
into his or her pocket. Stocks are not bought and sold by profits
or forecasts and dividends are not driven by analysts upgrades like
share prices can be - and so it
to follow the actual cash!
Here we've examined three parameters: (i) the cash conversion
ratio (measured by free cash flows % total revenues), (ii)
dividends to free cash flows ratio (cash dividends as a % free cash
flows) and (iii) revenue growth projections (2010-15 CAGR) to
evaluate our estimates of the cash position in the leading players
in the beauty and personal care industry.
Why Cash Conversion Ratio?
The cash conversion ratio shows how efficiently a company
converts sales to cash. This implicitly captures the
operational efficiencies and can avoid tax adjustments that could
have misleading impacts on net income. A high EBITDA margin, which
could be on account of high profit margins or better technology,
leads to a higher cash conversion ratio unless interest payments on
outstanding debt eat into these cash flows.
We estimate that Procter & Gamble and Colgate-Palmolive will
have better cash conversion ratios than their peers at around 14%
in the coming years. Avon has a low cash conversion ratio of 6%,
which highlights the need for improvements in its operational
efficiencies relative to peers.
Estee Lauder has a cash conversion ratio of around 4% but is
already on track to double it in the coming years by pursuing
improvements in operating margins.
Why Dividend to Free Cash Flow Ratio and Revenue
The company might be generating cash flow but many investors
like to see management pay this cash to shareholders and many
investors take the dividend policy into consideration before buying
stocks, especially in consumer related sectors. We decided to look
at dividend to free cash flow to compare how much companies are
paying out of the cash flow available.
We also include expected revenue growth to give an indication of
what growth should look like in the coming years. Here Avon,
Colgate and Estee Lauder top their peers with expected growth of
mid to high single digit revenue growth.
On these metrics, Revlon raises our concerns. We foresee low
revenue growth in the coming years at around 2% and the company is
trying to reduce its debt and so is unable to invest in growing its
business, for example through marketing, relative to peers.
Unilever has modest sales conversion to cash flow but has a higher
payout ratio than many if its peers making it desirable for
dividend hungry investors.
If we weighted these three factors equally, Colgate, P&G and
L'Oreal look to have a nice balance of free cash flow generation,
expected sales growth in mid to high single digits and are expected
to pay out somewhere close to half of their free cash flow by our
Below you can scroll through our sideshow for P&G to see our
key drivers and visit our site to see the companies mentioned.
See our full estimates for these companies.