Valuation: Avon Products Inc. (AVP)

Company Profile: Avon Products, Inc. (AVP) (obtained via Google Finance)

Avon Products, Inc. is a global manufacturer and marketer of beauty and related products. Its products fall into three product categories: Beauty, which consists of cosmetics, fragrances, skin care and toiletries (CFT); Beauty Plus, which consists of fashion jewelry, watches, apparel and accessories, and Beyond Beauty, which consists of home products and gift and decorative products. Sales from Health and Wellness products and mark, a global cosmetics brand that focuses on the market for young women, are included among these three categories based on product type. Its business is conducted worldwide primarily in one channel, direct selling. The Company’s segments are based on geographic operations in six regions: North America; Latin America; Western Europe, Middle East & Africa; Central & Eastern Europe; Asia Pacific, and China.

Business and Management Review

1) Is the business simple and understandable?

Avon has a fairly simple business model as they are in the business of personal vanity in terms of beauty products. They produce their beauty products and distribute them to retailers as well sell directly to consumers via their website.

2) Does the business have a consistent operating history?

In terms of operations there has been a consistent history as people continuously need and purchase cosmetic products. Looking at the company’s financials, however, tells a completely different story as both their top and bottom line have been erratic and inconsistent.

3) Does the business have favorable long term prospects?

We feel that Avon will continue to be a player in this industry in the future, but products such as these are subject to sensitivity to macroeconomic conditions within the economy.

4) Is management rational?

There is no reason to suggest management is not acting in a rational behavior.

5) Is management candid with its shareholders?

Investor relations are strong as their webpage cleanly lays out all relevant information for the investor.

6) Does management resist the institutional imperative?

We find no reason to have any concern related to this issue.

Financial and Value Review

Defensive:

1) Size of firm

Market capitalization is greater than $2 billion. Pass.

2) Strong financial condition

With a current ratio of about 1.3 Avon falls short of the required 2. Fail.

3) Earnings stability

Avon has reported positive net income for the past ten years. Pass.

4) Dividend record

The firm has paid consistent dividends for the past ten years. Pass.

5) Earnings growth

EPS have grown by 1/3 over the past ten years. Pass.

6) Price to earnings analysis

Our ModernGraham P/E for Avon is around 27(using our Methods) and is above the benchmark of 20. Fail.

7) Price to assets analysis

The P/B is roughly 7 and is significantly greater than the required 2.5. Fail. As well the weighted P/B and P/E ratio is not in line with our requirements. Fail.

Overall

Scoring 4/8, Avon fails the test for the defensive investor following Ben Graham’s investing criteria. We would not recommend this security for this class of investor(s).

Enterprising:

1) Strong financial condition

Current ratio is lower than the required 1.5. Fail. As well the debt to net current assets is less than the required 1.1. Fail.

2) Earnings stability

Avon has had positive net income for the past five years. Pass.

3) Dividend record

The firm currently pays a dividend. Pass.

4) Earnings growth

Earnings are not greater than what they were five years ago. Fail.

5) Price

The current share price is greater than our required 150% of net tangible assets. Fail.

Overall

Scoring only 2/5 Avon fails the test for the enterprising investor and should not be included in this investor’s portfolio if following Ben Graham’s investing philosophy.

Valuation:

We find a fair market price for Avon to be around $46 per share.

Opinion:

The current share price of $40 is in line with our valuation and our internal analysis recommends a hold if you currently own this security. However, for the individuals looking to acquire Avon we would not recommend this move as the stock failed both tests and is frankly too erratic for our taste.

None of the ModernGraham staff held a position in Avon at the time of publication. Also, please read our disclaimer and Our Methods.


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