Earlier this month, shareholders of Avon Products received a surprise when Andrea Jung stepped down from her post as chairwoman. Jung, who had served as CEO since 1999 until late last year, had been expected to serve out the position for two years.
Investors cheered the news, sending the shares up 7% to $17.39 on Oct. 5. The stock has since edged lower to $17.14.
Over the last few years, Avon has struggled under Jung's leadership. Supply chain issues, a bloated cost structure, lack of innovation, lost market share, and a bribery probe in China have plagued the firm.
At a Glance
| Price: | $17.14 |
| 52-Week Range: | $23.94 - $14.45 |
| Market Value: | $7.4 billion |
| Est 2012 Revenue: | $10.7 billion |
| Est 2012 Net Income: | $357 million |
| Est 2012 EPS: | $0.81 |
| Est 2013 EPS: | $0.99 |
| Est 2013 PE: | 17 |
| Dividend Yield: | 5.4% |
Source: Thomson Reuters
The stock has sunk 50% since its 2010 high.
Jung's replacements are very capable managers. The new CEO, Sherilyn McCoy, was one of two contenders for the CEO job at Johnson & Johnson. The new chairman, Fred Hassan, is a turnaround expert and a deal maker. He was CEO of Schering-Plough when it sold to Merck in 2009 for $41 billion.
This new management team seems committed to turning around the company. Over the next year, the shares could gain 30% to $22, as a result of the team's efforts.
Avon is the fifth-largest beauty and personal-care products company in the world. The company sells color cosmetics and skin-care products, as well as jewelry, watches and footwear. Avon is famous for directly selling its products through a large global network of representatives.
Despite its problems, Avon is not a broken business. The company makes 70% of its sales, and 80% of its profit, from fast-growing emerging markets like in Latin America and Eastern Europe. The company also has dominant market share in cosmetics and skin care in several countries in those regions, and will benefit from strong secular growth for beauty products.
This year, Avon is expected to earn $357 million, or 81 cents a share, on revenue of $10.7 billion. In 2013, analysts see earnings of 99 cents a share, on slightly higher revenue.
On the Aug. 1 conference call, CEO McCoy singled out the company's cost structure as one area that the company will focus on improving. That alone could go a long way toward lifting earnings.
Operating margins are expected to be 6.6% for the full year, well below 12.5% in 2008, and well below peers'. Bill Schmitz, who covers Avon for Deutsche Bank, notes that direct selling peers have margins of 14.7% on average. Much of that could be attributed to the company's bloated cost structure. In a separate report, Schmitz notes that the company's SG&A (selling, general and administrative expenses) is 26.8% of sales, compared to peers' at 17.7%.
McCoy will also focus her efforts on top-line growth, improved cash generation, and using technology to make the organization more efficient. While no specific plan has been laid out, management will likely announce one in the next few months.
An announcement could bring a cut to the company's dividend, now a payout of $400 million a year, or 92 cents a share. That's a 5.4% yield. On the same conference call, McCoy said that their "intention would be to bring Avon's dividend more in line with our overall performance and our peer group." Such a cut could reduce the dividend yield to 2.9%, saving the company $200 million a year. While a cut could hurt the stock initially, it's likely to be short-lived, as most investors expect it.
The shares could get a boost if the company were to settle its Foreign Corrupt Practices litigation, which dates back to a 2008 inquiry into whether Avon officials offered bribes to Chinese officials. The company spent $93 million in 2011 alone, relating to the inquiry. Progress is being made. The company disclosed in the last quarterly filing that it is currently in discussions with the Securities and Exchange Commission and Department of Justice to settle.
While Avon's stock may look expensive on current earnings, it's important to note that those earnings are depressed. As the turnaround takes hold, earnings could rise to where they stood a few years ago. In 2008, the company earned $2.04 a share. While that may take a few years, the potential for the stock could be significant. At a 15 times multiple on earnings, the shares would be worth $30.
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