REAL CLIENT MANAGED PORTFOLIO MEMORANDUM
TO:
FROM:
SUBJECT:
DATE:
Real Client Managed Portfolio, Fall 2012 Class
Brian Mulvihill, Eric Hoffman, Patrick O’Donnell
Revlon, Inc. Investment Recommendation
December 4, 2012
RECOMMENDATION: Buy
Macroeconomic and Industry Overview
The global makeup market was worth $43.6 billion in 2007, growing at a rate of 7.1% per
annum. However, this sector proved to be very cyclical as the industry declining 6.6% in 2008
and 3.3% in 2009. As the global economy picks up, the makeup industry is expected to reverse
and in 2013, many projections of the growth are approximately 3%. The U.S. is a major market
for color cosmetics, amounting to over 18% of the global market size. Revlon currently
commands over 20% share of the US market in color cosmetics. Overall, the cosmetic industry
has strong growth, but investors must be cautious of declining market share as the cosmetic
industry is a highly competitive market.
Company Overview
Revlon, Inc. (“Revlon”) is a leader in cosmetics, fragrances, and other beauty care products
worldwide. The company’s headquarters are located in New York, NY, and has a significant
presence globally – specifically in Australia, Canada, China and the United Kingdom. Brand
names include Revlon, Almay, Charlie, Jean Nate, Ultima II, Gatineau, and Mitchum. Revlon
also acquired Sinful Colors in March 2011 and Pure Ice in July 2012. Future growth of revenue
for Revlon depends on the continued evolution of their brands, ability to compete on a global
scale and improve their capital structure.
Valuation
•
Comparable Companies Approach
We found that Estee Lauder (OL) and L’Oreal (SA) were the closest public comparable
companies to Revlon. We analyzed the EBITDA margins, EV/EBITDA and P/LFCF multiples
from these two companies to project the stock price for Revlon, which was $22.61.
•
Discounted Cash Flow Analysis
We used moderate revenue growth rates in line with the US economy. Considering the implied
discount rate by the market (16.5%) and WACC of (9.1%), we set our discount rate at 11.6%.
Finally, the DCF target price per share is $22.71.
Recommendation
Our valuation shows that the company is significantly discounted by the market, which currently
prices the security at $14.90. Our discounted cash flow approach gives a price of $28.85; under
the same assumptions we used, the comparable companies approach presents REV as being
worth $22.16. We recommend that the portfolio buy the stock. Given our assumptions, we see
that the stock may be fairly discounted for the next few years. However, the security both
provides a high earnings yield and a diversification to the portfolio. We recommend that future
analysts pay particular close attention to Mr. Perelman’s actions as his company owns a
controlling interest in Revlon.