AVP - Valens Credit Report - 2018 04 10
Credit markets are grossly overstating credit risk with a CDS of 696bps and a cash bond YTW of 9.125%, relative to an Intrinsic CDS of 350bps and an Intrinsic YTW of 6.105%. Additionally, Moody's is materially overstating AVP's fundamental credit risk, with their B1 credit rating five notches lower than Valens' IG4 (Baa2) rating Incentives Dictate Behavior™ analysis highlights that management's compensation framework focuses them on all three value drivers, which should lead to Uniform ROA expansion and higher cash flows available for servicing obligations. Moreover, management members have low change-in-control compensation, limiting event risk for creditors Earnings Call Forensics™ of the firm's Q4 2017 earnings call (2/15) highlights that management is confident that they are taking a fresh look at their business with a sense of urgency, and in their direct selling strategy through the 70,000 Shakti ladies in India. Additionally, they are confident that they are reviewing all of their cost base to identify additional opportunities to mitigate future cost pressure, and that they have defined what good service means at Avon, allowing them to develop a clear framework and KPIs AVP is currently trading near historical lows relative to UAFRS-based (Uniform) Earnings, with a 16.8x Uniform P/E (Fwd V/E'). At these levels, the market is pricing in expectations for Uniform ROA to decline from 13% in 2017 to 10% in 2022, accompanied by immaterial Uniform Asset growth going forward. Given that valuations are likely being compressed by the market's inaccurate perception of the firm's credit risk, AVP could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement
Avon Products is a manufacturer and marketer of beauty and related products. The company's product categories are Beauty and Fashion and Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion and Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children's products and nutritional products. The company's business is conducted primarily in one channel, direct selling. The company's reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific.
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