Revlon (NYSE:REV) is a mass market manufacturer of the Revlon line of color cosmetics and hair care products. Fiscal revenues for the company were $1.4 billion in 2012. In the three quarters so far in 2013, sales stood at $1.02 billion, a bit lower than the $1.03 billion from the year prior period. Revlon has a market capitalization of $1.24 billion and currently has a market price of $23, below our price estimate of $24, which we believe is its fair value.
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Our $24 valuation assumes that Revlon is capable of maintaining an organic revenue growth rate of 3.6% annually until 2020, up from 3.2% seen in 2012 and lower than its compounded annual growth rate post the economic crash. Additionally, our valuation implies a 10 basis point annual increase in EBITDA margins for the company till 2020, due to better alignment of its product portfolio in relation to current market trends. (See: Here’s Why We Believe Revlon’s Top Line Growth Is Limited)
Of the four cosmetics manufacturer stocks we cover at Trefis, Revlon was the best performer in 2013, gaining close to 80% in stock value. The stock began 2013 at a market price of $15 and finished the year at approximately $25, marginally ahead of our $24 price estimate. However, the stock’s entire gain occurred in the first half of 2013. In this article, we underline reasons for the stock’s gain in 2013.
Market Underpricing, Balance Sheet Strengthening Boost Stock Value In H1FY13
Revlon began 2013 at a market price of $15, which we believe was lower than the stock’s fair value of $24. In February 2013, the company announced the issue of $500 million Senior Notes maturing in 2021, with an interest rate of 5.75%. The proceeds from this issue were utilized to repay existing debt pertaining to the $330 million Senior Secured Notes with an interest rate of 9.75% and maturing by November 2015.  This new debt issued at a lower interest rate reduced the burden of interest payments considerably in fiscal 2013. According to our estimates, Revlon’s average interest rate (Interest expense/Total Debt) declined from 1.7% prior to the refinancing in December 2012 to 1.3% by September 2013. Upon the announcement of the issue of new debt, Revlon’s stock price jumped about 21% to inch closer to its fair value.
Furthermore, refinancing its debt in February 2013 helped the company build a cash reserve. Revlon’s operations have been crippled with the lack of sufficient cash generation from its operating activities. Cash and cash equivalents for Revlon steadily expanded from $80 million in June 2012 to $141 million by June 2013. Revlon’s stock was buoyed by the company’s initiatives in strengthening its balance sheet by refinancing its debt in H1FY2013, despite a shortfall in earnings during the period. By July 2013, Revlon’s stock gained close to 80% in value due to above-mentioned initiatives and investor optimism.
Between July and December of 2013, Revlon’s stock only saw 0.44% growth in value. We believe the reason for this flat performance was the stock’s underpricing by the market in previous quarters. Revlon’s market price has corrected to its fair value in the first half of 2013, and hence, the stock’s gain during the latter half was tepid. In its third quarter, Revlon reported a third successive miss on earnings, with quarterly revenues of $339 million compared to its guidance of $342 million. Additionally, the bottom line was a huge miss, with the company posting a net income of 18 cents per share vs. analyst estimates of 44 cents per share. This led to an 8% fall in stock price post its Q3 earnings. However, the stock quickly recovered to its fair value of $24 by the end of the year.
2014 To Be A Transition Year For Revlon
Revlon’s acquisition of The Colomer Group (TCG) remains our focus for the fourth quarter of fiscal 2013 and fiscal 2014. The company expects complete business consolidation of TCG with the Revlon Group in Q4FY13. The acquisition of TCG was completed in October 2013 for $665 million in an all-cash deal. ((Revlon Press Release, Investor Relations, February 2013)) Revlon financed the acquisition through a new credit line for $700 million by upsizing its bank term loan facility. On announcement of the deal, Revlon’s stock price gained 7%.
TCG has annual sales of approximately $500 million, of which almost 50% is generated from the EMEA region. TCG’s product line is focused on professional hair care products and provides Revlon with sources to expand into the huge salon market. Within the U.S., salon hair care product sales stood at $63 billion in 2012 and grew 3.3% over 2011.  TCG provides Revlon with a new line of products, which are aimed at customers visiting salons. We expect the additional revenue generated from the acquisition along with benefits from cost synergy to contribute to better performance from the company in 2014. We have yet to update our model to reflect the Colomer acquisition, which is reflected in our market share forecast for Revlon in the hair care market.
On the flip side, Revlon’s burgeoning debt levels could increase the burden on interest payments. As of September 2013, Revlon had a total debt of $1.23 billion. The additional $700 million debt resulting from the TCG acquisition would expand the company’s debt levels to close to $2 billion. If the expenses resulting from TCG and the additional debt outweigh benefits from the acquisition, we could see a price correction on the downside for Revlon’s stock.Notes:
- Revlon Press Release, Investor Relations, February 2013 [↩]
- New 2012 Professional Salon Industry Haircare Study Shows Solid Growth for Salon Services and Retail Sales, PRWeb, March 2013 [↩]