Ryan Fuhrmann, CFA
May 1, 2007
Beauty product direct seller Avon Products‘ (NYSE: AVP) multiyear makeover appears to be gathering steam. But after a strong share price run, should investors still consider putting the moves on the stock?
Avon continues to be getting dolled up, as sales growth is indeed making its way to bottom-line profitability improvements. First-quarter results released earlier today saw total sales jump 9% and diluted earnings advance an impressive 183%.
Latin America continued to account for the highest percentage of sales, growing a respectable 7%. The next-largest region, North America, saw mediocre 3% growth, but international regions are being relied on as the top-line growth engine at Avon. Developing regions in Europe, the Middle East, and Asia saw double-digit sales expansion.Â The company considers China its own region, which grew an impressive 44%, though from an admittedly small base.
Operating profit also improved in all regions during the quarter, with notable strength here at home and in Latin America and Europe. It was nice to see higher profitability in more mature regions, as capital generated can be used to support growth in developing regions that benefit greatly from Avon’s direct-selling business model, which differentiates it from beauty-product peers such as Revlon (NYSE: REV), Elizabeth Arden (Nasdaq: RDEN), and even mighty Procter & Gamble (NYSE: PG).
The only smudge I saw was that operating cash flow fell well into negative territory, but one quarter doesn’t constitute a trend, and past free cash flow trends have been impressive. Unfortunately, the current stock multiple may already reflect Avon’s cash-generating prowess, including any future benefits from the multiyear restructuring as it hits its final innings.
Based on analyst expectations, shares of Avon currently trade at more than 20 times projected 2007 earnings, and I currently estimate they trade at close to 30 times trailing free cash flow.Â Turnaround efforts are definitely going smoothly, but at current levels it will take a lot more sales and earnings upside for me to consider paying up for the stock. Â Â Â Â
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy that needs no makeup.