To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. I propose we take a closer look at the good and the bad at Revlon (NYSE: REV ) , to see whether the stock is a good value or a potential money pit at just 12 times trailing earnings.
Revlon has rebounded nicely from a very tough 2008. It now finds itself with a growing market presence outside the United States. According to its latest quarterly filing, even with sales slowing in the U.S., almost every international market showed considerable growth, thanks to a good mix of new and core products.
Sales growth would have been flat if not for currency exchange rates. We have to keep in mind that the negative effect of currency exchange rates on revenue is usually short term. Negating these effects, Latin America and Asia showed phenomenal growth ,and could be a main focus of Revlon moving forward.
We've all heard the story about the straw that broke the camel's back, but in this case, it could be the debt load that crushes Revlon's.
Taking a look at Revlon's closest competitors reveals that while all of them carry a substantial amount of debt, they are all strongly free cash flow-positive, and can therefore use that cash to pay their interest expense while still investing in their businesses:
FCF (trailing 12 months)
FCF as a % of Debt
|Estee Lauder (NYSE: EL )
|Elizabeth Arden (Nasdaq: RDEN )
|Avon Products (NYSE: AVP )
Revlon, on the other hand, is dangerously short on cash flow, which could hamper its ability to make payments on its debt in the future, much less expand. In March, Revlon refinanced $800 million in loans, which are now set to mature in March 2015 at a variable interest rate similar to what it had been paying since 2006. So Revlon's borrowing costs have not gone down, even though rates have become much lower for many companies.
Revlon is a household name for many women in the U.S., but the company seems to be stuck in a very vicious debt cycle. I just don't see how it can make a dent into its massive debt pile unless its cash flow grows two- to threefold. With the only negative book value among those four listed above (due to its debt), I don't think even a high single-digit price-to-earnings ratio could attract me to take a risk on Revlon. Folks, I'd leave this one on the shelf.
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