Bill Miller Explains Why I Own Coty and Avon

I own Coty (“COTY”) and Avon (“AVP”).  In the interest of transparency, please note that I am currently long and quite wrong on both. 

I have posted about Coty before.  I have been planning to post a brief thesis summary and update to document my thought process (or lack thereof).  Then, a few weeks ago, I came across a video of a very famous (and very articulate) professional investor essentially summarizing my thoughts on these two positions for me.

So, my basis in AVP is about $5 per share and that is after some pretty serious averaging down (it trades at like $3 currently).  The Coty basis is ~$15 (also after some averaging down).

Now that you are on notice that you are reading the ramblings of a moron, let us listen to a genius set forth (basically) my analysis:

As of today, (a couple of months after this was recorded) it sounds like he’s up 50% on AVP.  I’m down almost that much….but that’s just for the moment, right?


Anyway, Miller is (kind of eerily) mind-melding with me on Avon.  First, it generates a few hundred million of FCF and/or operating earnings (which is what I like to look at).

But everyone knows that.   It is priced like that because it is going out of business.  Right?  Well, maybe.   On the positive they recently disposed of all the people who sagely passed on a ~$20 per share offer from Coty like four years ago (with backing from Buffett via Byron Trott, BDT lined up to help finance JAB…..i.e., financial buyers not strategic empire builders…at least that was my thought).

Avon is also finally going to “go digital.”  Well at least they are really saying it consistently now and they have hired some folks with the stated jobs of to getting that sorted.

They are also paying lip service to turning their focus to quality representatives and improving the representative experience/retention figures over a rolling period (versus just churning reps…focusing on new reps added…and maybe loading them up with inventory (and questionable receivables) to book sales).  I think these are the main prongs underlying Miller’s statement, “they’ve finally got the right strategy.”

A little bit more of my own “gloss” here:  Anyone who has been on Facebook knows that this type of direct marketing is still around.  It’s now called “social selling.”  Meanwhile, these guys have been mailing out catalogues.

The new(ish) CEO is a former Unilever operations guy/product line manager with a lot of developing markets experience.  In the conference calls he sounds like he is (typical of the Dutch, in my limited experience) all about the steak and not about the sizzle.

Anyhow, it is basically still a substantial business outside the U.S despite turrible management and strategy for at least the last decade and it is priced like it is going away.

Finally, you also have some activists and private equity investors (Cerberus, if memory serves) involved/on the board.  So, the owners are now in charge or at least aligned with management (versus entrenched, poor, management).

Within the last few weeks reports emerged that AVP is involved in talks with a big Brazilian beauty company (Natura).  We will see if anything good (i.e., $8-$10 per share) comes from that.

So I buy a little bit and “something good might happen.”

Coty, Coty, Coty

I have written before about Coty.  Miller said he was buying the stock for his personal account.  He didn’t go into as much detail about this one but it sounds like his take was a lot like my own.

Basically, Coty seems cheap (if it is not doomed).  The insiders, JAB, have been buying stock “hand over fist” way above the quoted price.  It sounded to me like he hasn’t been able to build a position large enough for his fund because JAB is so active and already hold like 40% of the float (he said, “they are buying every share they can get their hands on”).

JAB could be wrong, but at least we have a rational buyer with access to better/more information than the public has, using cash to buy stock and to serve as a “touchstone” on the path to estimating intrinsic value.

Since the Miller interview, the most recent Coty quarterly report kind of demonstrated that there was some legitimacy to management’s prior claims that the poor figures were due to transitory, operational issues.  That got the stock moving up from where it was around the end of 2018.

JAB also recently went through the trouble of launching a cash tender offer for the shares at $11.65, so you know, that helped move the stock up a bit.  I don’t like that price, so I don’t plan to tender.

Coty actually has posted sales growth in two of three business arms (luxury brands/fragrance and the professional nail and hair salon products) even during the last few poor quarters.  The numbers (and operations) are all still just riddled with a lot of noise from the massive merger with the former P&G beauty business and related issues, but the recent quarter seemingly provided a little bit of confidence that many of the issues might be of the type that can be sorted in time.

Changes at JAB

Since Miller spoke, I did come across an article [$]  published in January by the FT reporting on why Bart Becht left JAB (h/t to a poster in the COTY thread on COBF for alerting me).  Basically, Becht recently retired from Coty’s board and JAB.  The FT reported that this was due to a difference in opinion between Becht and his former JAB partners.

Becht reportedly wanted to maintain the status quo as far as the size of the investor pool/ scale of JAB (it was pretty much just the Reimann family money (scions of Reckitt Bensicker fortune) and the JAB partners…if memory serves) and to take time to digest the massive acquisitions they have effected both in coffee (Keurig and Krispy Creme and Caribou and Dowee Egberts, and Mondelez’ former coffee ops, etc…) and in beauty (via Coty).

The other partners reportedly want to grow JAB now and to go ahead and seek and deploy outside money and  add new JAB partners.

Becht’s plan seems highly preferable to me (as a Coty investor).  The desire to keep growing and seek outside money really changes my view on the sort of unique nature of the JAB operation.  I basically was interested in investing along side them because they were running their own/limited pool of money.  I also was more comfortable with Becht’s CPG background having followed his career.

My take on the JAB arrangement was that the apparent goal was to achieve the highest per share compound return (see, e.g. The Outsiders).  Maybe that wasn’t a stated goal but the way the shop was organized it seemed that being great (versus being big) was more likely to be the primary objective.

I would contrast this set up with a typical PE shop or asset manager.  In my opinion, the typical asset gathering/empire building operation, really has to contend with a higher level of conflict of interest to gather assets (versus just compounding their own capital at the highest possible rate).  Even in the best case, the empire builders are going to be allocating more finite resources, lots of road shows and money raising, and marketing all that jazz.  Also the ideas and talent are just going to have to be diluted.

This unorthodox set up doesn’t guarantee success of course (see, Kraft Heinz) but I like the incentives and their impact on what I see as the probabilities for potential outcomes.  I always want to minimize investing costs and that BIGLY includes agency costs.

In sum, I agreed with Becht’s reported view of how to proceed.  I am concerned about the plan to grow JAB into a larger PE shop/seek outside money.  I do not like that Becht bounced.

I’m not going to do anything precipitous about this, as doing nothing and avoiding transaction and other impacts is usually the best course.  I will, however, be looking at this position more critically and frequently given this change of circumstances.

In conclusion, Bill Miller likes my stuff.  I think that’s pretty cool.  Thanks for reading!