Transcript Revlon, Inc.
December 4, 2012
Introduction Portfolio implications Macroeconomic review Review of Company Relevant stock market prospect Financial analysis Financial projections Application of valuation tools Recommendation
The makeup market was worth $43.6 billion in 2007 growing at a rate of 7.1% per annum. However this sector proves to be very cyclical. The market value growth rate declined to 6.6% in 2008 and even turned negative to -3.3% in 2009. As the economy picks up, the market is expected to reverse and in 2011 many projections of the growth are approximately 3% Decline in volume growth rate in 2008-09: The number of makeup users grew at a stable 1.2% (global population growth rate). The growth rate of consumption per user dropped from 1.4% in 2007 to 0.7% in 2008 and further down It has been noted that the average per-unit price has declined during the recessionary times as consumers substituted lower-priced brands of a product on account of reduced disposable incomes.
Source: Consumer Confidence Jumps to Highest Level Since 2008 - http://www.bespokeinvest.com
US is a major market for color cosmetics, amounting to over 18% of the global market size and Revlon commands over 20% share of the US market in color cosmetics.
Anti-aging creams and anti-cellulite skin care products are in high demand among an aging population in the developed countries, notably Japan (with the oldest demographic), the US, and Western Europe.
REV was founded in 1932. The company markets its products through its own stores, mass volume retailers, chain drug and food stores, and the internet Product with volatiles sales periods, largely depending on the popularity of the products and advertising expenses Recent growth primarily though acquisitions
“ We are focused on the five elements of our business strategy, specifically, to (i) build our strong brands; (ii) develop our organizational capability; (iii) drive our company to act globally; (iv) increase our operating profit and cash flow; and (v) improve our capital structure. “ ▪ Alan T. Ennis, President and Chief Executive Officer
After a significant bidding war in 1986, Ronald Perelman paid $1.8 billion to Revlon's shareholders for control of Revlon, which is now 75% owned by Perelman’s MacAndrews and Forbes Holdings. Perelman had Revlon sell numerous divisions and replaced most management Following Perelman’s acquisition, the company did not report a profitable quarter until 2007
Brand names Revlon Almay Charlie Jean Nate Ultima II Gatineau Mitchum Products Skin care Bath and Body Cosmetics Hair Care Fragrance Products
Bargaining power of customers: High -Significant number of products offered by other companies.
-WMT is primary customer (~10% of sales) Threat of New Entrants: Low -Continually low margins reduce incentive Threat Substitute Products: High -Significant number of products Competition within rivalry: High -Especially during recessionary times Bargaining Power of Suppliers: Low -Chemicals, products, and packaging are provided at low margins -Evident in high gross margins at companies in industry
• • • • Strengths Strong Positioning Strong Growth Prospects Opportunities Innovation EMEA • • Weaknesses Limited Customer base Limited Operating Margin • • Threats Highly competitive market Consumer Preferences
Current share price = $14.90
Source: Yahoo! Finance – Rev 12/3/2012
Revlon stock performance vs. competitors Source: Google.com – REV 12/03/2012
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2.
3.
4.
Innovative, high-quality, consumer-preferred brand offering Effective brand communication Appropriate levels of advertising and promotion Superb execution with retail partners
1. Building our strong brands 2. Developing our organizational capability 3. Driving company to act on a global scale 4. Increasing our operating profit and cash flow 5. Improving our capital structure Source: 2011 10-K
Sales by Region
300 200 100 0 800 700 600 500 400 United States Asia Pacific Europe, Middle East and Africa 2011 2010 2009 Latin America Canada
• • • Net Sales - $1,381.4 million as of 2011 United States – 55% Outside U.S. – 45% (Canada, Australia, China, and U.K.) • • Increased $60 million (4.5%) year over year Driven by the inclusion of Sinful Colors in March 2011 • Improved profitability offset by June 2011 fire at Venezuela facility • Higher Net Sales expected for 2012 fiscal year after the acquisition of Pure Ice in July Source: 2011 10-K
• • • SG&A expenses increased $18.9 million in 2011 Driven by $17.8 million higher general and administrative expenses Fluctuations in foreign currencies Source: 2012 10-Q
Sales
COGS
Gross Profit
SG&A Other (Income)/Expense
EBIT
Interest Expense
Pre-tax Income
Income Taxes Minority Interest Preferred Dividends
Net Income Reported Income Statement Fiscal Year Ending December 31, 2009A $1,295.9
474.7
$821.2
629.1
21.3
$170.8
112.5
$58.3
8.3
1.5
$48.5
2010A $1,321.4
455.3
$866.1
666.6
(0.3)
$199.8
113.6
$86.2
6.4
$327.0
2011A $1,381.4
492.6
$888.8
685.5
-
$203.3
107.3
$96.0
36.8
6.4
$52.8
LTM 9/30/2012 $1,394.6
501.4
$893.2
700.0
21.0
$172.2
89.2
$83.0
36.0
6.4
$40.6
Weighted Avg. Diluted Shares 51.7
Diluted EPS $0.94
52.3
$6.25
52.3
$1.01
52.4
$0.78
Cash and Cash Equivalents Accounts Receivable Inventories
2011A
$101.7
212.0
111.0
Prepaids and Other Current Assets
Total Current Assets
94.0
$518.7
9/30/2012
$45.2
195.7
143.4
105.9
$490.2
Property, Plant and Equipment, net 98.9
Goodwill and Intangible Assets Other Assets
Total Assets
194.7
344.8
$1,157.1
99.9
217.7
375.8
$1,183.6
Accounts Payable Accrued Liabilities Other Current Liabilities 89.8
231.7
102.7
266.5
Total Debt Other Long-Term Liabilities
Total Liabilities
Noncontrolling Interest Preferred Stock Shareholders' Equity
Total Liabilities and Equity
1,179.3
300.8
$1,801.6
1,177.1
269.7
$1,816.0
48.4
(692.9) 48.3
$1,157.1
$1,183.6
Mid-Year Convention Sales
% growth
COGS
Gross Profit
% margin
SG&A
EBITDA
% margin
Depreciation & Amortization
EBIT
% margin
Taxes
EBIAT 2012 $1,409.0
2.0%
507.3
2013 $1,430.2
1.5%
514.9
$901.8
$915.3
Projection Period 2014 $1,458.8
2.0%
525.2
2015 $1,502.5
3.0%
540.9
64.0%
634.1
$267.7
19.0%
63.4
$204.3
14.5%
77.6
$126.7
64.0%
643.6
$271.7
19.0%
64.4
$207.4
14.5%
78.8
$128.6
2016 $1,547.6
3.0%
557.1
$933.6
$961.6
$277.2
19.0%
65.6
64.0%
656.4
$211.5
14.5%
80.4
$131.1
64.0%
676.1
$285.5
19.0%
67.6
$217.9
14.5%
82.8
$135.1
$990.5
64.0%
696.4
$294.0
19.0%
69.6
$224.4
14.5%
85.3
$139.1
Plus: Depreciation & Amortization 63.4
Less: Capital Expenditures (14.1) 8.1
64.4
(14.3) (0.6) 65.6
(14.6) (0.8) 67.6
(15.0) (1.2) 69.6
(15.5) (1.2)
Unlevered Free Cash Flow
Discount Rate Discount Period Discount Factor
$184.0
$178.1
$181.4
$186.5
$192.1
1.0
0.90
2.0
0.80
$164.9
$143.0
3.0
$130.6
$120.3
5.0
0.58
$111.0
CAGR ('11 - '16)
2.3% 2.2% 2.2% 2.0% 2.0%
Implie d Equity Va lue a nd Sha re Price
Enterprise Value Less: Total Debt Less: Preferred Securities $2,369.3
(48.3) Less: Noncontrolling Interest Plus: Cash and Cash Equivalents
Implie d Equity Va lue
45.2
$1,189.1
Fully Diluted Shares Outstanding
Implie d Sha re Price $22.71
11.0% 11.5% 12.0% 12.5% 13.0% 9.0x
20.44
19.61
18.80
18.01
17.24
Implied Share Price Exit Multiple 9.5x
22.11
21.24
20.39
19.57
18.77
10.0x
23.77
22.87
$21.99
21.13
20.29
10.5x
25.44
24.50
23.58
22.69
21.82
11.0x
27.11
26.13
25.18
24.25
23.34
Implie d Pe rpe tuity Grow th Ra te PV of Terminal Value as % of Enterprise Value Exit Multiple
Sales
% growth
COGS
Gross Profit
% margin
SG&A
EBITDA
% margin
Depreciation & Amortization
EBIT
% margin
Taxes
EBIAT
Plus: Depreciation & Amortization Less: Capital Expenditures Less: Increase in Net Working Capital
2013 $1,409.0
2.0%
507.3
$901.8
64.0%
634.1
$267.7
19.0%
63.4
$204.3
14.5%
65.0
$139.3
Projection Period 2014 $1,430.2
1.5%
514.9
$915.3
64.0%
643.6
$271.7
19.0%
64.4
$207.4
14.5%
66.0
$141.4
2015 $1,458.8
2.0%
525.2
$933.6
64.0%
656.4
$277.2
19.0%
65.6
$211.5
14.5%
67.3
$144.2
2016 $1,502.5
3.0%
540.9
$961.6
64.0%
676.1
$285.5
19.0%
67.6
$217.9
14.5%
69.3
$148.6
2017 $1,547.6
3.0%
557.1
$990.5
64.0%
696.4
$294.0
19.0%
69.6
$224.4
14.5%
71.4
$153.0
63.4
(14.1) 8.1
64.4
(14.3) 65.6
(14.6) (0.8) 67.6
(15.0) (1.2) 69.6
(15.5) (1.2)
Unlevered Free Cash Flow Present Value of Free Cash Flow $196.7
$190.9
$194.5
$200.0
$206.0
$167.4
$138.3
$119.9
$104.9
$92.0
Current Price Implied Discount Rate $15.00
17.50% Unrealistic discount rate implied by current market price after considerable reduction in debt load and very conservative revenue growth assumptions.
Target Company Revlon, Inc.
Comparable Companies
The Estée Lauder Companies Inc.
L'Oreal SA High Average Median Low
Equity Value Enterprise Value EnterpriseLTM EBITDA LTM Value Margin EBITDA NTM EBITDA Market Value LTM NTM LTM Net IncomeNet IncomeLFCF Greenblatt Ratio Earnings Yield $778 $1,958 16.55% 8.48x
6.73x
18.96x
8.96x
4.8x
10.32%
$22,926 $82,088 $23,242 $81,785 17.84% 19.33% 13.31x
15.59x
15.59x
14.45x
14.45x
13.31x
12.1x
NM 12.10x
12.10x
12.10x
12.10x
26.12x
24.93x
26.12x
25.53x
25.53x
24.93x
21.53x
NM 21.53x
21.53x
21.53x
21.53x
34.26x
40.09x
40.09x
37.18x
37.18x
34.26x
6.20% 5.39%
Implied Share Price
LTM EBITDA EBITDA Multiple
Enterprise Value
Less: Total Debt Less: Preferred Securities Plus: Cash and Cash Equivalents
Equity Value
Fully Diluted Shares Outstanding
Implied Share Price
$234.1
10.0x
$2,340.6
1177.1
48.3
45.2
$1,160.4
52.357
$22.16
Buy 500 shares at Market ~$7,450 DCF - $22.71
Comps - $22.16
Significantly undervalued due to Perelman factor, present price = $14.90