Revlon Slumps 15% on Venezuela Factory Fire, Creates Buying Opportunity


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

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



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