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ModernGraham Valuation: Avon Products Inc. (AVP)

moneyCompany Profile (obtained from Google Finance): Avon Products, Inc. (Avon) is a manufacturer and marketer of beauty and related products. The Company’s product categories are Beauty, Fashion and Home. Beauty consists of color cosmetics, fragrances, skin care and personal care. Fashion consists of fashion jewelry, watches, apparel, footwear, accessories and children’s products. Home consists of gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. The Company’s segments are based on geographic operations and include commercial business units in Latin America; Europe, Middle East & Africa; North America, and Asia Pacific. It has centralized operations for Global Brand Marketing, Global Sales and also has regional operations for marketing, sales, and supply chain. The Company has sales operations in 64 countries, including United States. In addition to these countries and territories, its products are distributed in 43 other countries and territories.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 ** See conclusion
MG Opinion Overvalued
Value Based on 3% Growth $8.34
Value Based on 0% Growth $4.89
Market Implied Growth Rate 10.48%
Net Current Asset Value (NCAV) -$4.58
PEmg 29.46
Current Ratio 1.59
PB Ratio 6.62

Balance Sheet – 9/30/2013 

Current Assets $3,432,000,000
Current Liabilities $2,154,800,000
Total Debt $2,590,200,000
Total Assets $6,528,300,000
Intangible Assets $312,700,000
Total Liabilities $5,417,000,000
Outstanding Shares 433,770,000

Earnings Per Share

2013 (estimate) $0.25
2012 -$0.10
2011 $1.20
2010 $1.36
2009 $1.46
2008 $2.04
2007 $1.21
2006 $1.06
2005 $1.81
2004 $1.77
2003 $1.39
2002 $1.11

Earnings Per Share – ModernGraham 

2013 (estimate) $0.58
2012 $0.89
2011 $1.41
2010 $1.48
2009 $1.53
2008 $1.57

Conclusion:

Avon Products is another company that fails to satisfy either the Defensive Investor or the Enterprising Investor.  The company has seen its earnings falling over the historical period, and it has even seen a negative earnings year.  In addition, the company is trading at a high PEmg and a high PB ratio.  All of these things indicate to value investors that the company entails a level of risk that should be averted.  It is difficult for an investor to place money in a risky investment without it turning into speculating, and one of the 7 Key Tips to Value Investing is to avoid speculation.  From a valuation perspective, the company’s drop in earnings leads to the ModernGraham valuation model concluding that no value comes from the earnings.  Meanwhile the market is implying a growth rate in earnings of over 10%, which is clearly not supported by the historical performance.  As a result, Avon would appear to be overvalued at this time.

What do you think?  Do you agree that Avon Products Inc. is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Avon Products Inc. (AVP) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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