Positive news about the lower number of jobless claims and higher private-sector hiring pushed the stock market up for one more day — more on that in the “Overall Market” section.
Welcome to the third edition of the IPO Review series by The Daily Scoop editorial team.
Every Monday, we take a look at one new IPO and shed light on the good, the bad, and the ugly things every investor should know before investing. The first edition was inspired by the delightful experience of walking into a new kind of a medical clinic at One Medical (Ticker: ONEM). The second edition was about Casper Sleep (Ticker: CSPR) that is also delighting customers by giving them the best sleep experience they deserve. For our 3rd edition, it’s now time to step away from delightful experiences and walk into the world of a $13 billion company that has just become publicly available to U.S. investors and no one is talking about it.
But first, here is a recap of what happened in the market on Friday:
- U.S. markets: All three indices finished Friday in the red. Scroll down to the “Overall Market” section to read more.
- Cryptocurrency: Bitcoin’s price is now above the $10,000 mark. Whenever Bitcoin price surges as rapidly as it has been in the last few months, the volume of the discussions about fraudulent, Ponzi scheme activities in the crypto market multiplies. Once again, we are reading that fraudulent activities are one of the main drivers of growth in the crypto market, and there is still no way for individual investors to figure those things out.
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The market put its feet on the brake, but not really.
What happened last week?
After a few days of non-stop upward movement, the stock market took a breather, and all three indices finished Friday in the red. Regardless of the decline, last week was a rare 5-day period through which all three indices grew more than 3%, with the Nasdaq leading the pack by more than 4% gain in only five days.
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Natura &Co (Ticker: NTCO) is the parent company of two of the brands that many American consumers are particularly familiar with. Most Americans recognize the Avon brand for its cosmetic-selling home parties. And, those of us that are no strangers to going to a mall can easily recognize the smell of candles and flowers that fills the air as you pass by The Body Shop. Natura &Co owns these two brands, however, it is not an American company. It’s a $13 billion Brazilian company that also owns other cosmetic brands such as Natura and Aesop, and just became available to the U.S. investors through its American Depository (ADR) on New York Stock Exchange (NYSE).
Why Natura &Co?
We were so curious and surprised about this stock. Did you know Avon home parties are still going on? To be honest, had you asked us yesterday, we would have told you Avon must have gone bankrupt a long time ago. In the digital age, who throws cosmetic shopping parties? However, we were so wrong. Natura &Co has seen so much potential for Avon that has acquired the company just recently. We saw the valuation of the company topping $13 billion and we had to jump in and see what it’s all about.
For this review, we are using the company’s latest quarterly earnings report in advance of its ADR listing in the U.S.
Before we start, let’s learn something together. Foreign companies such as Nature &Co can either go public in the U.S. directly, through an IPO process or choose to offer an ADR which is a financial product that mirrors the movement of the company’s stock in its home stock exchange. Natura &Co filed for its ADR and became publicly available in the U.S. in early January 2020.
And now, the good, the bad, and the ugly things you’d need to know before investing in NTCO:
- Double-digit revenue growth. Even before the Avon acquisition, the company’s net revenue (without the impact of currency) was growing at more than 10%, and the company has been opening new stores for some of its brands such as Aersop and The Body Shop.
- Sustainability at the heart. The company is committed to socially sustainable growth strategies. It focuses on avoiding animal-testing and empowering women in more than 100 countries around the world with its direct selling model. Moreover, its Carbon Neutral Program won the 2019 UN Global Climate Action Awards. Let’s not forget that The Body Shop brand is a B-Corp organization which means it meets rigorous standards of social and environmental performance, accountability and transparency.
- Debt reduction. The company has been focusing on debt reduction. It has managed to reduce its debt-to-equity ratio from 3.27X in Q3 2018 to 2.98X in Q3 2019, and the management believes it’s on track to reach its debt-to-equity ratio target of 1.4X by 2021 in spite of the Avon acquisition.
- The Avon acquisition impact. The acquisition of Avon leads to corporate restructuring through which a new holding company is being formed. Structural changes are possible threats to any company’s future growth, and Antura &Co is no exception. Moreover, the company has paid $3.7 billion for Avon’s acquisition which has led to the decline of its EBITDA by more than 17%.
- The uncertain future of direct selling sales model. The combined company has more than 6 million sales consultants (also known as the Avon sales ladies) operating in 100 countries around the world. As the world moves to digital commerce, it is unclear whether direct selling is a scalable growth model. This is a market that has been declining by more than 7% per year globally.
- The lack of media scrutiny. The combination of Natura and Avon created the 4th largest pure-play cosmetic company in the world. However, judging from the lackluster coverage of the ADR becoming available on New York Stock Exchange by financial media, it’s fair to assume that we will not get much support from analysts in evaluating the company’s performance, despite having an ADR available to us to invest in.
The company’s valuation is around $13 billion. And, the combined revenue of Natura &Co and Avon is more than $10 billion. That means the price to sale ratio is approximately 1.3X. That’s a relatively fair valuation for a company that believes it has a significant growth opportunity in Latin America, China, and the rest of the world.
It is clear for us that the direct selling model may be a better fit for the emerging markets in Latin America and the rest of the market. For example, according to Market Watch, “China is the second-largest market for direct selling business in the world and is significantly contributing to the growth of personal care and cosmetic products in the Asia Pacific market.” For investors in the U.S., this may seem a surprising decision, however, we are adding the stock to our watchlist to monitor the company’s performance for a few quarters before deciding to invest or avoid the stock altogether.
There you have it. The third edition of the IPO series is in the books now. How did you like it?
What other IPOs should we consider? You can find the list of all new IPOs on the SEC’s website. Click here to see the list. If we get 10 Scoopers to ask for a detailed analysis and review of any specific company, we will dedicate one full Scoop to it just like today’s edition. The power is in your hands now…
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