Is Avon Products the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Avon Products (NYSE: AVP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Avon Products.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 5.9% Fail
  1-Year Revenue Growth > 12% 6.4% Fail
Margins Gross Margin > 35% 62.9% Pass
  Net Margin > 15% 5.6% Fail
Balance Sheet Debt to Equity < 50% 188.1% Fail
  Current Ratio > 1.3 1.42 Pass
Opportunities Return on Equity > 15% 39.9% Pass
Valuation Normalized P/E < 20 18.71 Pass
Dividends Current Yield > 2% 3.3% Pass
  5-Year Dividend Growth > 10% 5.9% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Avon Products comes up square in the middle with a score of 5. The well-known cosmetics company has gotten a lot of attention lately, but its business prospects aren't as attractive.

Avon's socially based direct-selling model seems like a perfect fit for the times, given the rise of social media. But the company faces a huge amount of competition. Mary Kay and Tupperware Brands (NYSE: TUP  ) are just two of the many rivals that have at-home selling events. Moreover, big-name cosmetics companies like Estee Lauder (NYSE: EL  ) and Revlon (NYSE: REV  ) have made a big splash in shopping malls, with retailers like Ulta (Nasdaq: ULTA  ) threatening to oversaturate demand for cosmetics.

The company has had restructuring plans in place for years, but more recently, attention has focused on the potential for an acquirer to buy Avon out. Some have named L'Oreal as a possible buyer, but so far, the only result has been higher share prices on the takeover speculation. In particular, despite its strong presence overseas, the company hasn't been able to match its competitors' growth.

Avon once demonstrated how a simple business model could translate into a huge enterprise. But the business needs a major makeover if it's going to restore confidence to investors and become relevant again. Until that happens, the blemishes it's suffered in the recent past will keep it from being a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Avon Products to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Tupperware Brands. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2011, at 2:23 PM, stocksdoctor wrote:

    Just wanted to mention that the L'Oreal story is indeed out there, but it is an Oct. '10 story too. It came out in an English newspaper last fall, but apparently hasn't gone anywhere yet. Don't recall anybody denying it specifically, but neither was it confirmed. With stock trading in $26-28, it is no longer trading on takeover valuation. Stock pays nice divs, but is generally rated 2 out of 5 stars, based on poor excution in its overseas expansion, i.e. China/Brazil. The future will tell whether these execution shortfalls are fixable in the near term.

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