Avon Products (NYSE:AVP) is one of those time-warp companies for me. It seems so '60s. I can't say I've ever met an Avon Lady. I don't know anyone who uses the products. It competes in a tight space with the likes of Estee Lauder (NYSE:EL), specialty items from Limited Brands' (NYSE:LTD) Bath and Body Works, and even consumer giants like Procter & Gamble (NYSE:PG). And recently, it's fallen on some pretty hard times.
The stock has been brutalized since late 2004, when it was up above $45 a share. If you check out that roller coaster, and my thoughts on the pop back up to $45, you'll find one of those rare situations where timing and opinion came together to make me look a lot more clever than I am. Growth was slowing then; shortly thereafter, the wheels came off.
Today the Street's bidding up the stock by 5% on the news of a 6.5% increase in revenues and a 67% drop in net profits. For the first quarter, revenues totaled just more than $2 billion, and earnings per share came to $0.12. The company says the drop is mostly owed to $0.19 in restructuring costs, plus that danged stock-option expensing, but it's only fair to point out a couple more tidbits.
First, there's some of the inevitable "big bath" type expensing included here, such as the $27 million in inventory reduction. Also, note that the results were also on the receiving end of some largesse from Uncle Sam, which brought the effective tax rate down to 20.3% from the prior year's 31.5%.
For this investor, the big news here is revenue growth -- or lack thereof -- which is slow all over except for in Latin America, where 28% growth was juiced by an acquisition, but even that wasn't enough to overcome higher costs. There's also a lot of buzz about China and the direct-selling license the firm recently obtained, but I'm always skeptical of companies who wave the China card. Finally, the big restructuring is reportedly going to save the firm scores of millions per year, beginning with the 1,300 job cuts announced earlier in the week. That might be true, but cost-cutting is one of those earnings-growth stories that you need to see before you can believe.
That said, Avon is a long-term survivor kind of company that is worth a hard look -- at the right price. Assuming everything gets back on track, and giving Avon a conservative growth estimate (a bit less than the 11% analysts are expecting per year for the next 5 years), I think the shares are worth about $35 to $38 each, meaning there's not much of a discount at today's rate. I'll consider a Unilever (NYSE:UL) or a Procter & Gamble at that kind of minor discount, but Avon? No thanks. The Avon Lady is welcome to bang on my door if these get down to around $26 a stub. Until then, I won't be answering her call.
Unilever is a Motley Fool Income Investor recommendation. If you'd like a look at other steady, cash-paying powerhouses, a free trial is available.
Seth Jayson is from Minnesota, where the mosquitoes laugh at your puny Skin So Soft, then carry away your dog. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
