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"When asked on equivalence I said: EU would need special vigilance on financial stability risk, not special deal to access the City [London]."

Revlon’s Beautiful Outlook

The stock could be worth more than twice its current price, even if top shareholder Ron Perelman doesn’t relinquish control.

Beauty-products giant Revlon is the ugly duckling of the beauty space in the eyes of investors. The stock has long traded at a deep discount to rivals.

At a recent $32.00, Revlon shares (ticker: REV) go for an enterprise value of nearly nine times 2017 estimated earnings before interest, taxes, depreciation, and amortization. That compares with 13 to 15 times Ebitda for peers Coty (COTY), Estée Lauder (EL), and L’Oréal (LRLCY).

The reasons for the discount are well known. Billionaire Ron Perelman owns 77.5% of Revlon through his holding company, MacAndrews & Forbes. He has controlled the business since 1985, and is Revlon’s chairman. His control leaves a relatively small public float, limiting the stock’s liquidity, and Perelman has a reputation for being unfriendly to minority shareholders.

Despite those issues, Revlon is a first-class franchise, with familiar brands, including Revlon, Almay, and Mitchum, among others. The stock has rewarded shareholders handsomely over the past few years, and could continue to do so. Barron’s wrote a bullish story on Revlon in June 2013, when the stock was about $20.

One top holder, Chris Mittleman, chief investment officer of Mittleman Brothers, thinks Revlon can command a multiple more in line with its peers’. He thinks the stock is worth $76—an enterprise value of 13.5 times his 2017 Ebitda estimate of $500 million. While the discount may persist as long as Perelman controls the company, Mittleman contends “that doesn’t mean the stock can’t rise dramatically while maintaining the discount.”

In the past six years, Revlon has grown revenue 51% and Ebitda 60%, by making market-share gains and acquisitions. In September, Revlon paid $900 million for cosmetics maker Elizabeth Arden, which has struggled in recent years as its celebrity fragrances have become less popular with consumers. The deal is expected to generate substantial synergies, and could turn out to be opportunistic.

Fabian Garcia, formerly the chief operating officer of Colgate-Palmolive (CL), was appointed CEO in April. His leadership appears to bode well for Revlon’s future.

No Wall Street analysts publish estimates for the company, another likely contributor to its discount to peers. For 2016, not including Elizabeth Arden, Revlon has guided for $410 million in Ebitda on $2 billion in sales. The combined companies will generate $3 billion in sales.

Mittleman expects free cash flow of $115 million, or $2.20 a share, in 2017. Not including restructuring charges, he estimates $175 million in free cash flow.

Founded 80 years ago by Charles Revson, New York–based Revlon sells cosmetics, hair-care products, and fragrances through mass channels, such as drugstores and supermarkets, and on the Internet. The company has leading positions in lipstick, lip liner, eyeliner, and other categories, such as nail polish.

Including Elizabeth Arden, its sales are split geographically, with 60% from North America, and the remainder from international markets.

Over the past 10 years or so, global beauty sales have been growing at a roughly 5% annual clip. Mass-market cosmetics such as Revlon’s, which are sold in retailers like Wal-Mart Stores (WMT) and in drugstores, have been slower-growing, compared with the “prestige” brands sold at Sephora and in department stores.

ELIZABETH ARDEN, which has a stable of prestige brands, including Juicy Couture and John Varvatos designer fragrances, could help spur organic growth at Revlon. As of late, Elizabeth Arden has shown signs of turning around. In the September quarter, the business registered its seventh quarter of net sales growth, helped by new products and a focus on revitalizing its existing brands. Arden’s Ebitda margins are considerably lower than the 19% margins that Revlon enjoyed in 2016. With the companies combined, the figure could slip to just over 17% this year. But in time, as Arden is fully integrated, profitability should pick up.

Initially, management identified $140 million in cost synergies, but in a filing released this month, Revlon said it expected that the synergies would exceed that. On the revenue side, Elizabeth Arden has a strong presence in the fast-growing Chinese market, which could aid Revlon. Both companies have sizable overlap in their customer base, so there are cross-selling opportunities.

Revlon’s highly recession-resistant business generates stable cash flows. The balance sheet, with $2.7 billion in net debt, is highly leveraged, but that level looks manageable.

Perelman, 74, isn’t getting any younger. A year ago, he announced “strategic alternatives” for Revlon, leading many to speculate that a sale might be in the works. Instead, the Arden acquisition followed, and the speculation has been tamped down.

But the potential still exists. Unilever (ULVR.UK) has long been thought of as an acquirer, going back to the late 1990s. Several acquisition-oriented Asian companies, such as Shiseido (4911.Japan) and LG Household & Health Care (51900.Korea), could be potential suitors. In 2014, LG expressed interest in acquiring Elizabeth Arden.

Still, it’s important to keep in mind that, if the past few years are any guide, a sale isn’t necessary for Revlon’s stock to rise.

A Wary Mexico Awaits Trump’s Changes

America’s neighbor has seen the peso hammered. Now it girds for the wall, new U.S. taxes, and Nafta revisions. Time to be wary.

Mexico once advertised itself as “The Amigo Country,” but for investors in 2017, it isn’t looking like a friendly place.

President-elect Donald Trump reiterated last week that he will build a wall on the border and make Mexicans pay for it. Increasingly unpopular President Enrique Peña Nieto, whose term expires in mid-2018, responded, “Mexico, of course, will not pay.” The wall, however, should matter less to investors than a big unknown: which Republican-proposed income-tax reforms Congress will actually pass. What Trump has proposed is designed to discourage U.S. companies from importing goods. That potentially could trigger a multifaceted trade war between the U.S. and a number of other countries.

The other unknown—proposed revisions to the North American Free Trade Agreement—could turn out to be a big positive for investors if Trump, and his Canadian and Mexican counterparts, can build a stronger trade bloc to prevent partially assembled goods sneaking in from other countries. The percentage of a product that has to be manufactured in North America to avoid tariffs could rise, says Carlos Peyrelongue, Mexico equity strategist at Bank of America Merrill Lynch.

The U.S. probably has a greater quantity of low-hanging fruit to address in its massive trade deficit with China, which is much larger than that with Mexico. An overhaul to Nafta is more likely than a U.S. exit, says BofA Merrill Lynch. But in the near term, there will be plenty of negative headlines, as negotiations unfold.

THE COMBINATION OF TRADE UNCERTAINTY and already-sluggish Mexican economic growth—roughly 1.7% in 2017—have pressured the Mexican peso, which has weakened by roughly 17% over the past 12 months. As Trump spoke about Mexico last week, the iShares MSCI Mexico Capped exchange-traded fund (ticker: EWW) hit a 52-week low.

While the peso is searching for a bottom, it hasn’t yet found it, says Ali Chughtai, a portfolio manager at London-based emerging market hedge fund Whard Stewart. The peso looked oversold in November in the postelection selloff, but going long hasn’t been a good call, and it will take time for short positions to shake out after there’s more clarity on taxes and trade policy. This exchange-rate volatility tops the list of risks for Mexican corporate-bond issuers, Moody’s Investors Services said in a note last week.

Investors this year should be underweight Mexican equities, which account for roughly 3% of the MSCI Emerging Markets index, UBS says. Of its four reasons, the main one is that the price/earnings ratio of roughly 16 times forward earnings is hard to justify. Second, earnings growth of 18% probably is overstated. Third, economic growth looks weak with little help from the U.S. economy. Fourth, inflation is rising, and so are interest rates.

If you need exposure, look for Mexican companies with international revenues that offer a hedge against currency and consumer weakness. Those could include beverage producer Coca-Cola Femsa (KOF), telecommunications company America Movil (AMX), and tortilla, bread, and snack producer Grupo Bimbo (BMBOA.Mexico).

There’s a lot of fear baked in, but investors will need to wait for more clarity from Washington before making Mexico an amigo in portfolios again.

A Rebounding Unilever Has Room to Rise

With most of its sales coming from overseas, Unilever is one of the few large European companies with insulation from political shocks.

Anglo-Dutch consumer-goods giant Unilever ’s stock has recovered lately after a stumble in the third quarter, as investors weigh its defensive qualities against businesses with greater exposure to Europe’s political uncertainties.

Unilever shares (ticker: ULVR.UK) came under pressure in 2016’s second half, as tougher competition in some countries and weaker emerging-market currencies took a toll. Unilever’s underlying sales, which exclude currency changes, rose 3.2% year on year in the third quarter, while volume fell 0.4%, missing forecasts and sending shares down 3.5% on the day the figures were released. But after hitting a 12-month low in mid-November, its stock has rebounded 7%.

Unilever is the third-largest consumer-products manufacturer by sales after Nestlé (NESN.Switzerland) and Procter & Gamble (PG). It owns an impressive stable of well-known brands, from toiletries such as Dove, Lux, and Sunsilk to foodstuffs like Flora, Hellmann’s, and Ben & Jerry’s.

Ernie Cecilia, chief investment officer at Bryn Mawr Trust, says Unilever’s difficulties have made it cheap relative to peers. He estimates its price/earnings ratio at 19, compared with P&G’s 21. “One of many attractions in Unilever is that it’s very consistent in terms of revenue growth, and most of it’s organic,” he says.

UNILEVER IS CURRENTLY Bryn Mawr’s only recommended direct investment in Europe, where Cecilia says concerns about uncertainty ahead of elections in France, Germany, and the Netherlands outweigh positives. Although Unilever has European roots, it generates most of its income elsewhere. “About 58% of the company’s sales come from emerging markets, while North America counts for 19%. What you have is a broad-based company that benefits from being domiciled in Europe while generating most of its income internationally,” he says.

Unilever, says Cecilia, has made smart, accretive, growth-boosting acquisitions. It is making more products in countries where they are sold, lowering manufacturing and transportation costs. “So when you look at Unilever, you have a company with very little debt, strong free cash flow, an attractive valuation, and decent dividend growth that currently yields 3.4%. We like the top-line growth story, the fact that sales growth has been consistent,” he says.

While Cecilia credits Unilever with generally deriving revenue from volume gains rather than price hikes, it lifted United Kingdom retail prices by 10% in October, to soften the effect of sterling’s weakness on its dollar-denominated commodity costs after the Brexit vote. That drew the ire of British retailers such as Tesco (TSCO.UK), which threatened to take Unilever products off its shelves.

It has also been pressured by India’s withdrawal of 500-rupee ($7.35) and 1,000-rupee notes to combat corruption, which caused a cash shortage. Berenberg analyst James Targett expects India to weigh on Unilever’s fourth-quarter results, with sales there falling 20%. Tighter competition in China and pressure on Latin America sales, especially in Brazil, will also continue, he says.

Despite that, Targett has it as a Buy, with a price target of 45 euros ($48.03) or 39 pounds ($47.98), a 16% upside. “With 76% sales from country category cells where Unilever is gaining or holding share and good growth in new product launches, both supported by its increased speed to market via third-party collaboration…we are confident it can accelerate organic growth,” he says. Unilever shares closed at €39.03 in Amsterdam and £33.83 in London on Friday.

US president-elect has proposed policies that could cut red tape and boost sales

A watch ticks, a fanfare swells, a shrill alarm sounds and a deep voice intones, “Good morning, Mr President.” In this television ad, Swiss watchmaker Vulcain airs pride in its presidential history — Harry Truman, Dwight Eisenhower and Lyndon Johnson were all fans of Vulcain and every successive president except George W Bush has owned one.

It remains to be seen, however, whether Donald Trump, the incoming US president, will help the watchmaking industry or worsen the problems Swiss manufacturers have experienced since 2014. Exports, according to the Swiss watch industry federation, are down 10.3 per cent in the two years to November 2016 and by 28 per cent in Hong Kong and 22 per cent in the US, the two biggest markets.

Executives from the luxury industry are already talking to Mr Trump. Bernard Arnault, chief executive of LVMH, which owns watch brands like Hublot and TAG Heuer, met him on January 9 and said LVMH, which derives 9.2 per cent of its revenues from watches and jewellery, might consider expanding its operations in the US.

Policies Mr Trump mentioned on the campaign trail have broad relevance to the watch industry. If his administration were to push through the income tax rate cuts promised, that could boost the spending power of wealthy Americans when the dollar is already at near 14-year highs. Indeed, the DXY dollar index, a measure against a basket of peers, began its upturn in mid-2014 and has risen nearly 27 per cent since, including more than four percentage points following Mr Trump’s election victory.

There has been a sustained Trump-driven stock market rally. The Dow Jones Industrial Average has advanced more than 8 per cent since the election and continues to push on. This, together with the economic growth that Mr Trump has promised, could boost the luxury market in general and watches in particular.

“Trump certainly has a pro-business stance and bringing back jobs to the US and growing the economy is very much part of his mantra,” says Giles English, co-founder of UK-based watchmaker Bremont. “That sort of talk undoubtedly boosts confidence and people are more inclined to spend when they feel confident about the future.”

Rogerio Fujimori, an analyst at RBC Capital Markets, says the US offers long-term growth for the industry, considering “the mismatch between the big US wealth pool (which contains 35 per cent of the world’s population classified as of high net worth) and limited penetration of Swiss watches (relative to other luxury categories)”.

In keeping with his “America First” trade policy, however, Mr Trump has nominated Robert Lighthizer, an advocate of protectionism, as his US trade representative. While his policies will have more bearing on relations with China, they could ensnare Switzerland’s watch industry.

“The industry’s fortunes are linked to growth in the number of wealthy and middle-class people globally, says Jelena Sokolova, an analyst at investment research business Morningstar. “If Trump’s protectionist policies have [an] adverse impact on Chinese growth and wealth creation, it could impact the industry negatively.” However, such conclusions remain farfetched at the moment, she adds.

Mr Trump’s protectionist policies that have so far been used to shame and strong-arm automakers and industrial companies like Carrier into keeping jobs and manufacturing plants in the US could bring further scrutiny to US watchmakers like Shinola. Last year, the company agreed that it would move away from its “Where American is made” slogan after the Federal Trade Commission said it felt the phrase was likely to mislead consumers about the extent to which its watches and other products were made in the US.

The FTC’s guidelines require companies that use “Made in America” slogans to have products that are “all or virtually all” made domestically.

Shinola made concessions, including “applying corrective hangtags and information cards . . . to alert consumers to the fact that those products include significant imported content”. But the company told the Financial Times, “Shinola is not a ‘Made in America’ play, it is a company with a sincere interest and devotion to creating American jobs in industries where manufacturing has left our shores.”

Mr Trump has promised to repeal “job-killing” regulations, a move which the watchmaking industry would in general welcome. “The American Watch Association has always stood for, promoted and supported the reduction of taxes and tariffs on watches and the elimination of burdensome regulation on watch companies and their suppliers,” says Alyson Gottlieb, a spokesperson for the association.

The dollar may have further to strengthen under Mr Trump, if the US economy continues to grow and the Federal Reserve accelerates the pace of its interest rate rises should Mr Trump’s proposed stimulus measures raise inflation. While the strong dollar benefits domestic spending, many US department stores and retailers have warned that it has cooled tourist expenditure.

That could counterbalance the pressure the industry has faced from the strong Swiss franc, however, which has driven up manufacturing costs. The franc has appreciated nearly 12 per cent against the euro since January 2015.

Recent performance by some of the best-known Swiss watchmakers shows how sombre the industry’s mood is. Richemont, the luxury conglomerate which owns brands like Vacheron Constantin and Cartier, abolished its chief executive position last year. Founder Johann Rupert emphasised the need to “slim down” as the group’s interim results showed that operating profits had fallen 43 per cent and sales were down 13 per cent.

Sales at Swatch, which owns Breguet and Omega, decreased by more than 11 per cent in the first half of the year and profits fell by more than half. Analysts estimate sales will drop nearly 5 per cent in the second half.