Avon Products (
) has had a volatile 12 months with its stock price touching a high
of around $36 in the fall to a low of around range of $26 in March.
We value Avon with a
$31 Trefis price estimate of its stock
at roughly a 10% premium to its current market price, which is
still hovering at the lower end of its 52-week range. Here we take
a closer look at the potential upside and downside risks to our
otherwise optimistic outlook on Avon's stock. Avon competes beauty
and personal care companies like Estee Lauder (NYSE:EL), Revlon
(PINK:LRLCY) all of which distribute through third-party retail
outlets vs. Avon's direct selling business model.
~30% upside scenario | $40 Trefis price estimate for
1. Number of Sales Representatives (+10%)
Direct selling has served as an alternate and an additional
source of income for many during recessionary times. With the U.S.
unemployment rate hovering at over 9% as of June 2011, the job
market still has a long way to go before it recovers to normal
levels, and this could encourage more people to sign up as sales
We currently estimate Avon's sales force will grow from 6.5
million as of 2010 to 8.75 million over our forecast horizon. In a
scenario where there is a drawn out macroeconomic recovery, we
expect a steeper rise in the number of sales representatives to
almost 9.5 million by the end of our forecast period leading to a
10% upside to our current $31 Trefis price estimates of Avon's
2. EBITDA Margin (+20%)
Despite bypassing operating expenses such as retail space
rentals and retailer margins which are associated with selling via
brick-and-mortar stores, Avon still has to incur hefty expenses in
printing brochures amounting to over $472 million in 2010
advertising to the tune of $400 million and accepting returns of
unsold or obsolete products worth almost $131 million. This feeds
through to lower EBITDA margins of close to 12%.
We currently forecast the EBITDA margin to rise to 13.3% in the
coming years predominantly due to fewer promotional pricing
activities and a recovery in spending on higher priced cosmetics.
In a scenario where EBITDA margins rise further than our
expectations facilitated by the recent restructuring programs
ushered in 2009 to around 16% - this leads to almost 20% upside
~20% downside scenario | $24 Trefis price estimate for
1. Number of Sales Representatives (-10%)
Avon leveraged the poor employment status of the U.S. economy
during the recessionary 2008-09 by expanding its sales force from
5.4 million in 2007 to 6.2 million in 2009. This however led to
lower sales per sales representative, which in turn attracts fewer
reps to sign up.
Hence, in the future, if Avon is more conservative on expanding
its sales force, and the number of sales representatives only rises
to 8 million by 2017 vs. the 8.75 million we estimate, there could
be 10% downside to our current estimates.
2. EBITDA Margin (-10%)
Since much of the growth shall be sourced from emerging markets
in Asia and Latin America behind more competitively priced products
often through promotional or discounted pricing, this could weigh
on profit margins. If this deteriorates EBITDA margin below our
forecasts, there could be downside to our forecasts. In a scenario
where margins reduce to around 10%, this leads to 10% downside to
our current $31 Trefis price estimate of Avon's stock.
View our detailed analysis for Avon's stock