Special Situations: AVON (AVP US)
If someone wanted to bid again, now would be opportunistic: BUY. (also BUY NUS US) AVP US: US$15.06; NUS US: US$75.02
February 13, 2013 We would be cautious buyers of Avon. In the short-term, we believe that two factors could push the share price higher: (i) resolution of FCP investigations that could improve the margins by as much as 100bs (ii) better than expected turnaround of the business, in terms of both cost reduction and sales growth. On a risk-adjusted basis, we would set a short-term target price of $16.9 for AVP. As an aside, we prefer Nu Skin (NUS US) , a direct competitor of Avon operating a similar business model but with a better execution, track record and growth profile. However, AVP faces long-term challenges to its business model and significant actions are necessary to create a sustainable model. Poor execution problems (in implementation of IT infrastructure, product offerings, management of reps etc.) continue to affect AVP's operational performance while heavy competition in key markets is chipping away AVP's market share. We note that AVP's direct competitors such as NATU3 BZ (main competitor in the Brazilian market) and NUS US seem to have better execution model and have managed to grow revenue and margins despite a difficult direct selling environment. Particularly, NUS US has been growing its margins and sales aggressively and consensus expects the company to maintain this growth going forward. Despite these issues, AVP continues to command high brand awareness vis-à-vis its peers and leading market share in direct selling globally. A renewed buyout offer for AVP from either Coty or another player is possible and would be opportunistic, particularly after the stock's plunge from 24 to 14 in the last few months. However, the poorly performing direct selling business model will continue to be a deterrent. FULL REPORT ATTACHED