It's the People, Not the Products, that Drive Avon Stock


It's the sellers, not the buyers, that drive Avon's ( AVP ) stock value. What differentiates Avon from other beauty and personal care players such as L'Oreal ( LRLCY ), Procter & Gamble ( PG ), Estee Lauder ( EL ) and Unilever ( UL ) is not what it sells but how it sells. Avon is the largest direct selling organization in the world, with over 6.2 million sales representative generating annual revenues of nearly $11 billion in 2010.

Avon sells everything from shower-gels to watches to nutritional supplements. While others sell their products through third party establishments like drugstores or mass volume retailers (think Wal-Mart), Avon sells its products directly to the final consumer. Avon's sales representatives are independent contractors that pitch Avon's products to consumers and, upon receiving an order, buy the product from Avon at a discount and earn the difference.

Direct selling brings Avon closer to the consumer. When a sales representative visits a household, he gets access to the consumer's other personal and home-related requirements. This explains why Avon has such a diverse portfolio of unrelated products, as it allows the company to generate more sales per consumer visit. Since a higher number of sales representatives leads to higher sales totals, it is actually the number of sales representatives that drives Avon's stock value.

How Does Avon's Seller-Driven Model Shape its Business?

Resistance to Economic Downturns

During the economic downturn in 2007-08, year-on-year growth in the number of sale representatives increased from 2% in 2007 to 7% in 2008 as people looked for alternative source of earnings amidst rising unemployment levels. Thus, when the global economy was heading for a recession, Avon posted a 13% rise in revenues in 2007 and 8% in 2008.

Impact of the Size of its Sales Force

We currently estimate a moderate 2% annual rise in the number of Avon sales representatives through our forecast period (from about 6 million in 2010), and our $36.60 price estimate for Avon stock remains notably sensitive to this metric. If, for example, Avon's sales representative total were to instead rise by 3% annually, it would imply 6% upside to our price estimate. As it stands, our $36.60 price estimate is already about 30% above the stock's market price.

You can test your own assumptions for Avon's sales representatives total, and see how various scenarios affect the company's stock value, by dragging the trend line in the interactive chart above.

See our full analysis and $36.60 price estimate for Avon stock

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AVP , EL , LRLCY , PG , UL



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