REV - Revlon

[tombgrt]

Anyone looked at Revlon already?

 

Revlon is in the business of mass market cosmetics. It's one of Mittleman Brothers largest holdings at 12% and that's how I found it. They have held the stock for years. It has no analyst coverage.

 

2016 EBITDA is expected to come in between $350 en $400M. Even at $350M you pay 10x EV/EBITDA. This is before their acquisition of Elizabeth Arden this year (I have yet to dig in those numbers and valuation as well). Competitors like L'Oreal tend to trade around 15x EV/EBITDA. Revlon achieves almost he same EBITDA margin of 19-20%. Growth I believe is somewhat lower however. Revlon expects decent synergies from the acquisition of Elizabeth Arden.

 

One negative is Ron Perelman holding over 75% of the shares through a holding company. He generally isn't known for his kindness to minority shareholders. If the stock falls from here due to an earnings miss or recession, he could tender for the rest of the shares for a small premium.

 

So relative to it's competitors this stock seems decently undervalued by at least 50% at current prices but that is just assuming low end EBITDA and not including synergies from the acquisition etc. I might be interested if the stock goes lower from here but I have no idea how you can discount the Perelman-factor.

 

 

Would be interested in hearing other views and insights. TIA.

 

 

[DooDiligence]

Anyone looked at Revlon already?

 

Revlon is in the business of mass market cosmetics. It's one of Mittleman Brothers largest holdings at 12% and that's how I found it. They have held the stock for years. It has no analyst coverage.

 

2016 EBITDA is expected to come in between $350 en $400M. Even at $350M you pay 10x EV/EBITDA. This is before their acquisition of Elizabeth Arden this year (I have yet to dig in those numbers and valuation as well). Competitors like L'Oreal tend to trade around 15x EV/EBITDA. Revlon achieves almost he same EBITDA margin of 19-20%. Growth I believe is somewhat lower however. Revlon expects decent synergies from the acquisition of Elizabeth Arden.

 

One negative is Ron Perelman holding over 75% of the shares through a holding company. He generally isn't known for his kindness to minority shareholders. If the stock falls from here due to an earnings miss or recession, he could tender for the rest of the shares for a small premium.

 

So relative to it's competitors this stock seems decently undervalued by at least 50% at current prices but that is just assuming low end EBITDA and not including synergies from the acquisition etc. I might be interested if the stock goes lower from here but I have no idea how you can discount the Perelman-factor.

 

 

Would be interested in hearing other views and insights. TIA.

 

Perelman not being friendly to minority shareholders (must be a holdover from his days with Michael Milken but in those times the minority was entrenched management.)

 

Gotta admire his commitment though (I wasn't aware that he still owned this.)

 

Too bad there's not more leverage (as if I could do anything like he did with it...)

[Oreo]

'Revlon trades at 10x EBITDA whilst competitors trade at 15x EBITDA' - good relative value, but not good absolute value. It's like when CMG goes from $700 to $500 and someone says that it now must be good value.

 

The entire sector is overvalued, in my opinion. It's just that Revlon is a bit less overvalued, but still overvalued.

[tombgrt]

Well, I agree that absolute valuation should Always be the focus and goal in any analysis.

 

But I don't agree with your cmg comparison. Relatieve to it's competitors cmg at 500 probably was still overvalued compared to peers given the lower/no growth.

 

On absolute valuation I can say that L'oreal made an acquisition in the sector at 15 times ebitda many years ago when valuations should have been much lower compared to now.  Can you explain further why you believe the sector is clearly overvalued? Then it has been for at least a few years.

 

 

*edit: damn autocorrect

[Oreo]

Apologies, I should have expressed myself better.

This was a mini-rant against the over-use of relative valuation metrics, where one says that stock A trades at a 20% EV/EBITDA discount to the sector, thus 'buy'. Single stocks and entire sectors can be overvalued for extended periods. 'Price is a liar'.

With Revlon (and to an even greater extent, for its ilk) I see little-to-no scope for sufficient margin expansion and organic growth that give a new buyer at this point a 15% medium-term IRR with no multiple expansion.

And then, in the past few years I've seen all sorts of small 'boutique' brands of beauty & toiletry products spring up here and there, competing for the shoppers' attention. Barriers to entry into this industry are not that big. Barriers to getting really big in the industry are significant though, because it is almost all about marketing. Actual functionality of the product is almost the same across the board.

[tombgrt]

Thank you for explaining further Oreo, appreciate it.

 

I don't know whether the discount versus peers is enough but I understand the sentiment that it doesn't garantee anything return wise. Regardless, you make a good point on the competitive nature of the business and it's something I would need to look into further. Organic growth is almost non-existent currently but I believe Mittleman thinks this could change with changes in minimum wage etc as they operate in the lower segment of the market. I'd personally file this thinking under pure speculation.

[CorpRaider]

Been dicking around with Coty, but have done nothing and am long AVP below 5 (price @ Cerberus converts).  I like the business.

[kab60]

Laughing Water Capital has a very bullish writeup on Revlon fyi (I've looked at it but can't get comfortable with valuation, and I don't understand the space very well).

[DooDiligence]

I've had Revlon on a watch list for a while & it still looks too pricey.

 

Women are beautiful with no makeup at all but they'll always think they need to doll up.

[tombgrt]

Laughing Water Capital has a very bullish writeup on Revlon fyi (I've looked at it but can't get comfortable with valuation, and I don't understand the space very well).

 

Thank you. For those interested:

 

http://laughingwatercapital.com/wp-content/uploads/2014/01/Laughing-Water-Capital-Q2-2016.pdf

 

I didn't realize cosmetics industry is this recession-proof. Certainly a fair reason for higher valuations.

[tombgrt]

Mittleman now has a 14,8% position in Revlon. Sure are confident!

[Sunrider]

Any views on the recent results? Prepping for when the incentives become effective in March next year? :o

 

Thanks !

[kab60]

Well, it wasn't exactly uplifting to listen to management - seems like they'll have a hard time reaching their guidance and after solid growth earlier in the year it seems to have stalled. No idea what to make of that, really. Might be seasonality. Might be something different. That said, it might all be prized in, and they seem quiet comfortable of reaching their cost synergies with Elizabeth Arden, but a lack of track record makes it difficult for me to handicap whether that's true or they're just optimists. I see the attraction, and I'm interested, but as always I'd like it cheaper to derisk the case. What do you think?

[Foreign Tuffett]

$140M in synergies seems high to me. Elizabeth Arden was only doing ~$1 billion in revenue.

[Sunrider]

Well if tom bogart is right and the laughinwatercapital piece is half-correct, it's cheap (as Tom's numbers are ex 140 for synergies, let alone a revenue uplift they may get to at some point).

... but I have absolutely no understanding of the industry and what could go wrong, let alone do I know if the CEO's skills from Pepsi transfer.

 

C.

 

 

Well, it wasn't exactly uplifting to listen to management - seems like they'll have a hard time reaching their guidance and after solid growth earlier in the year it seems to have stalled. No idea what to make of that, really. Might be seasonality. Might be something different. That said, it might all be prized in, and they seem quiet comfortable of reaching their cost synergies with Elizabeth Arden, but a lack of track record makes it difficult for me to handicap whether that's true or they're just optimists. I see the attraction, and I'm interested, but as always I'd like it cheaper to derisk the case. What do you think?

[Homestead31]

PG and Unilever both announced weakness in cosmetics sales in their latest earnings as well.  seems like its industry wide, and REV reported a decrease in consumer sales.

 

in my view however as always it is a waste to focus on quarter to quarter movements in sales and earnings.  on a 3 year time line an investment in REV is going to work or not work based on how the integration of RDEN goes, and if RDEN's business is crap or not.

 

RDEN sales have been moving up for a few quarters now, which suggest the business is not crap.  for the integration, we will have to wait and see. 

 

RDEN revenue has no relevance when considering how much there might be in synergies.  what matters is operating expenses, economies of scale and removal of duplicative efforts.  RDEN had ~$440 million in SG&A last year. $140M could very easily be low.  they are invcentivized to be conservative, not aggressive.

 

Another concern is that RDEN has more exposure to department stores than REV, and we all know that malls/department stores are challenged on foot traffic.  However, as noted RDEN revenue continues to climb higher, so this concern seems to be in check for now.

 

another thought is that while REV is cheap vs comps on EV/EBITDA, it is more inline on EPS.  Comps are mostly mature and pay out their earnings as dividends, and are arguably part of the stocks as bond proxies in a low rate world phenomenon.  As (if?) rates rise, and dividends become less attractive vis a vis bonds, I'd expect comps to sell off, and REV will likely go with them. 

 

in my mind, that is the wrong way to look at REV as REV has great options for capital allocation (paying down debt or acquisitions that move the needle) while comps can basically just pay out earnings in dividends (which is inefficient) because they are debt free and too big to move the needle with acquisitions unless we are talking MEGA acquisitions which seems unlikely as there has been a move toward "simplifying business models" by the comps.

 

As for Mittleman, i assume you are getting the 14.8% from their website.  that doesn't necessarily mean they increased their position as it is % of portfolio ex cash.  Looks like they exited HRG which was a big position for them, so cash levels could be high at the moment, which would make REV a bigger % even if they didn't add. 

 

in my opinion REV is screaming cheap for investors that can look out a few years, so maybe they did add.

[Homestead31]

Revlon speaking at the BAC leveraged finance conference.

 

the deck is here: https://www.sec.gov/Archives/edgar/data/887921/000115752316007480/a51468439ex99_1.htm

 

but in my view, more important than the deck is the fact that the company is out communicating with the street.  this is a marked change from the past, and an indication that the new CEO & Perelman are focused on share price.

[tombgrt]

Thanks Homestead31.

 

 

I also wonder why Perelman wouldn't rather keep quiet and try to take it private with a tender offer for the remaining 22%. Does he need at least 90% or is it 85% of shares for Revlon? Idk the rules that well. If it's just 85%, it don't see what's stopping him from finding just 7% at a reasonable premium (but far from full value). Even if it's 90%, just 60% of the free float has to agree to tender, assuming he doesn't buy any more shares in the open market. Right? Mittleman owns not enough shares to have a big enough impact on the voting. Better than nothing but still.

Decent risk that you get fucked over sooner or later if you ask me.

 

 

in my opinion REV is screaming cheap for investors that can look out a few years, so maybe they did add.

 

Thank you for this post, some great insights I didn't consider yet. But I don't know how to discount the fact that you might get screwed over at the end of those few years.  :-X

 

[sae85400]

EL would be another one in this sector to look at

[Homestead31]

I don't know how to discount the fact that you might get screwed over at the end of those few years.  :-X

 

no question - you have to get comfortable with Perelman on some level to own this.  A few thoughts:

 

1) historically everyone has said, "you'll never get a full multiple because of Perelman" which is likely correct.  however, as the Seeking Alpha pieces point out, you don't need a full multiple for a successful investment if operationally the company continues to improve (increase revenue, realize synergies and thus increase EBITDA, and pay down debt).  Right now, at prices below when the deal was announced, the stock is priced as if the company will 100% fail to do any of these things, while recent history realizing synergies and integrating a major acquisition, recent revenue performance at RDEN and Colomer, and what the company says in the latest deck suggest that they may not fail.  At these prices, the bar is thus "may not fail" which is a low bar.

 

2) Perelman tried to steal the company during the financial crisis, and he got smacked down.  In theory, this should make him less likely to do it again.

 

3) Mittleman has proven in the recent CKEC battle that he is not afraid to self-finance campaigns to protect shareholders when management is screwing them.  Perelman is surely aware that Mittleman would make it as difficult as possible for him to screw other shareholders

 

4) Take this with a grain of salt b/c it is just arm chair psychology, but Perelman is in his mid 70s with no heirs in the business.  On some level he is likely beginning to consider his legacy.  He is a known philanthropist, and when his time on this earth is up, i am sure he would rather be remembered for his charitable giving etc. rather than as the guy who screwed minority shareholders in one of the last chapters of his storied career.

 

5)  The new CEO has a $10M stock grant that gets priced in 4 months.  I have never met him and am not questioning his character, but consider Munger's thoughts on incentives.  It is not hard to imagine that the CEO is slow-playing the integration and allowing RDEN's margins to drag on REV's margins for a bit longer than necessary in order to keep the share price lower for the pricing of his equity package.

 

6) If you capitalize expected synergies (which may be low) of $140 million at 10x, you almost have the market cap, and you have about 35% of the EV.  10x is very conservative for a recession proof business.  take a look at the slide in the deck from yesterday that shows the global beauty industry over the last decade or so.  if they didn't point out where the great recession was, you would never know it even happened.

[Homestead31]

Revlon filed an 8K today: https://www.sec.gov/Archives/edgar/data/887921/000115752317000003/a51484722.htm

 

The relevant section reads, " the Company has identified incremental annualized synergies and cost reductions that are expected to significantly exceed the previously-disclosed $140 million in annualized synergies and cost reductions."

 

emphasis mine.

 

Granted the debt situation and Perelman's controlling position mean that there are a wide range of possible outcomes here, but looking out a few years I continue to think this is extraordinarily cheap and that shareholders are more than compensated for the debt profile and Perelman.

 

In reference to the previous poster who suggested taking a look at Estee Lauder (EL), note that EL trades at 13.7x EV/adj. EBITDA, while Revlon trades at 8.0x EV/adj. EBITDA (pro forma including original synergy estimate).  If you figure that the "significant" excess synergies are $25M, it is more like 7.6x.  $25M could very easily be low as in the Colomer acquisition synergies were ultimately 40% higher than originally forecast.  If synergies turn out to be 40% higher in this case, then REV is trading at 7.2x.

 

at 13.7x (EL's multiple) REV would be trading at $95 per share (based on stated PF T12M EBITDA inc. synergies + $25M in additional synergies) which is about 3x where it is currently trading.

 

to be clear, i do not expect REV to achieve a comp multiple in the near future, but the margin of safety is enormous.  At 11x, a multiple which I think is extremely punitive for a recession proof business that has been growing rapidly, REV would trade at $65, more than 100% upside. 

 

 

[tombgrt]

That's extremely good news. Considering for example a multiple of 14x EV/EBITDA, an extra 40% in synergies ($56m) would add half the current market cap to the fair value of the business. Sure, those are aggressive assumptions  but it shows the kind of leverage you got here! At $25m and 11x multiple you still get a respectable 17%+ additional upside. In other words, Mr market is still drunk from New Year's eve or he knows something that we don't.

 

Bought some and plan to buy some more.

[kab60]

Agreed. I also added to my stake. Leverage is high, but they refinanced at a perfect time.

[bonkers]

I think they are leveraged up to their eyeballs. ::) They are at the moment 6.5x Net Debt/pro forma adj.EBITDA. Even though the company has hinted that synergies will be bigger and come mostly in 1-2 yrs, they are not here yet.

 

Having said that, I don't think they are going to get killed unless they mess up the merger, shrinking cash flow due to internal or competitive turbulence. And they must absolutely not need any access to capital markets.

 

I have not followed the cosmetics business at all, but just reviewing the press the general impression is that RDEN was almost collapsing, and all the FCF starts from REV side. So there is definitely need for a large axe here, and the management must be absolutely ruthless at their job, "3G like" I suppose. So knowing the management is critical.

 

I do not understand the strategies, channels, and consumer trends well enought to even tell if the combination makes any sense, or if the "synergies" are bogus. I'm not saying they are, but one would need to be an expert to know that. I'm not. Not to mention any possible clash of cultures. According to media, both companies had their issues, and this merger was kind of forced hand even for REV (although that might be inaccurate).

 

What makes this a winning, or even a functioning combination?

[ScottHall]

This looks kind of like an equity stub. Should do well if the business grows organically.