Revlon (NYSE:REV) stock gained a staggering 75% in the last
couple of months rising from under $10 in the beginning of January
to over $17 by the end of May. Subsequently the stock corrected by
about 15% the first week of June raising some concerns that one of
the leading color cosmetics and beauty care products maker's stock
got ahead of itself. We decided to take a closer look and believe
that some of the concerns are overdone, and we stand by our
$17.60 Trefis price estimate of its stock
. Revlon competes with other leading beauty care companies across
the globe such as Estee Lauder (
EL
), Avon Products (
AVP
) and
L'Oreal
(NYSE:LRLCY).
Promising outlook for the next few quarters
Revlon managed to turn around its decline in sales that averaged
around 4% a year between 2007-09 and posted 2% growth in 2010.
Revlon's sales further grew by an impressive 9% (7% organic,
excluding FX gains) in Q1 2011 hinting at momentum continuing in
the near future. Lower inventory obsolescence, sales returns and
overhead expenses helped Revlon improve gross margins by a full 2%
points funding an expanded marketing and advertising budget, which
then translated into the sales. See
Revlon Earnings Show Recovery Underway, Debt Levels
Should be Next Focus
.
Minor business disruption
A fire damaged Revlon's facility in Venezuela on June 5, 2011.
The company has yet to evaluate the extent of damage to its
business but given that Venezuela makes up for only 3% of Revlon's
sales and its total asset base and so the subsequent 9% drop (from
$16.50) in Revlon's stock since June 06, 2011 was exaggerated in
our view.
Risk associated with leverage, overplayed
Revlon continues to be heavily levered with a debt burden in
excess of $1.2 billion, which is more than Revlon's total sales in
a year,
Zacks Investment research, June 03' 2011)) While there is nothing
new about this, it does raise concerns
amongst some investors even against a promising outlook. The
trading volumes are reflective of this trend. From close to 85k
shares exchanging hands on May 31' 2011, the trading volumes jumped
to over 120k for June 07, 2011 as investors sold Revlon to cut
losses or just to book profits.
Since Revlon's fundamentals still look strong, we maintain our
bullish outlook for the stock. However, we still wait for Revlon's
further communication on the impact on its Venezuelan operations
before updating our estimates.
View our detailed analysis for Revlon