Over the past week, Avon Products (AVP +0.00%) experienced a significant drop in share price from $22.40 per share to only $17.50 per share after it reported sluggish third quarter earnings results. Right after that, its share price bounced back to $18.30. Let's take a closer look to determine whether or not Avon Products is a good buy after its plunge.
Global restructuring takes a lot of time
In the third quarter, Avon's sales declined by 7% to $2.32 billion. This was mainly due to negative currency exchange movements in emerging markets. Excluding the currency impact, its revenue decreased by 1% compared to the third quarter of last year. Its net income swung from $31.6 million last year to a loss of $5.5 million this year. The company blamed its sluggish third quarter performance on macroeconomic headwinds and several struggling areas, including North America.
Avon has been in the process of global restructuring. This includes cost saving and workforce reduction initiatives. Avon has an ambitious goal of $400 million in cost reductions by 2015. The company plans to cut its global headcount by 400, close some operations in Europe, Africa, and the Middle East, and exit several markets such as Ireland, South Korea and Vietnam.
However, like any turnaround, it will take a lot of time, patience, and persistence to make this restructuring successful. For the remainder of the year, the company has confessed that the sales recovery will take longer than it expected. Despite the ongoing progress in the EMEA (Europe, the Middle East and Africa) and Latin America, the business in North America and the Asia Pacific was still quite weak. Looking forward, Avon will focus on its cost structure in North America to drive savings and improve profitability in this business unit.
Employ a high leverage ratio
What makes me worry is Avon's capital structure. As of September 2013, it had $1.13 billion in equity, $808.3 million in cash, and more than $2.78 billion in debt. With around $572 million in EBITDA, or earnings before interest, taxes, depreciation and amortization, Avon's net debt/EBITDA is 3.44. Herbalife (HLF +5.26%) and Nu Skin Enterprises (NUS +3.27%) are much better capitalized.
In the past twelve months, Herbalife generated around $800 million in EBITDA, while its net debt was only $57 million on total stockholders' equity of $456 million, so its net debt/EBITDA was only 0.07. Nu Skin has the best balance sheet among the three with net cash of $213 million, while its EBITDA was $400 million for the trailing twelve months.
How about Herbalife and Nu Skin?
Herbalife has been in the middle of a war between two big funds. Bill Ackman publicized his $1 billion short in the company, arguing that Herbalife was a pyramid scheme. However, the famous investors Carl Icahn and George Soros did not agree. They demonstrated their disagreement with Ackman by purchasing nearly 17 million shares and five million shares, respectively, of Herbalife. Since then the business has kept growing nicely. The company expects that for the full year of 2014, its year-over-year net sales growth will be around 9%-11%, with adjusted earnings per share around $5.45-$5.65.
The recent third quarter was an excellent quarter for Nu Skin. It reported record revenue of $928 million, 76% higher than the same period last year. Its diluted EPS came in at $1.80 per share, more than double the diluted EPS for the third quarter of 2012. The great results were due to impressive operating performance in its Greater China and South Asia/Pacific regions, as well as South Korea.
Nu Skin also raised its full year 2013 guidance. It expects that its 2013 earnings will be in the range of $5.77-$5.82. However, investors should be careful because the market is already cheering about Nu Skin's impressive third quarter results, which means it's no longer cheap. Currently, its EV/EBITDA is around 13.4, much higher than Herbalife's EBITDA multiple of only 8.1.
My Foolish take
Avon's turnaround journey definitely won't be smooth at all. Investors should expect that it will take several years and there could be many bumps along the road. With a high leverage ratio and struggling performance, I am not interested in Avon at the moment. Herbalife seems to be the best choice among the three with a low leverage ratio, growing operating performance, and a low valuation.
