Avon Products, Inc. (NYSE:AVP) and e.l.f. Beauty, Inc. (NYSE:ELF) are the two most active stocks in the Personal Products industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Avon Products, Inc. (AVP) has an EBITDA margin of 6.21%, compared to an EBITDA margin of 31.25% for e.l.f. Beauty, Inc. (ELF). This suggests that ELF underlying business is more profitable. AVP’s ROI is 19.00% while ELF has a ROI of 6.00%. The interpretation is that AVP’s business generates a higher return on investment than ELF’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AVP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, ELF’s free cash flow per share was +0.05. On a percent-of-sales basis, AVP’s free cash flow was 1.23% while ELF converted 0% of its revenues into cash flow. This means that, for a given level of sales, AVP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. AVP has a current ratio of 1.40 compared to 2.10 for ELF. This means that ELF can more easily cover its most immediate liabilities over the next twelve months.
AVP trades at a forward P/E of 9.35, and a P/S of 0.21, compared to a forward P/E of 45.57, a P/B of 7.22, and a P/S of 4.52 for ELF. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AVP is currently priced at a -31.5% to its one-year price target of $4.00. Comparatively, ELF is -19.85% relative to its price target of $31.33. This suggests that AVP is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for AVP and 2.10 for ELF, which implies that analysts are more bullish on the outlook for AVP.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. AVP has a beta of 1.93.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AVP has a short ratio of 1.24 compared to a short interest of 10.82 for ELF. This implies that the market is currently less bearish on the outlook for AVP.
Avon Products, Inc. (NYSE:AVP) beats e.l.f. Beauty, Inc. (NYSE:ELF) on a total of 7 of the 10 factors compared between the two stocks. AVP generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, AVP is the cheaper of the two stocks on an earnings and sales basis, AVP is more undervalued relative to its price target. Finally, AVP has better sentiment signals based on short interest.