Usually, when a public company files for Chapter 11 bankruptcy protection, it’s a sign to move on to other investment ventures. However, with cosmetics giant Revlon (REV), the company has unwittingly attracted positive attention from meme-stock traders. While the narrative is awfully treacherous, it’s not completely unfounded. I am neutral on REV stock.
To be clear from the get-go, REV stock is not appropriate for the overwhelming majority of investors. Whenever bankruptcy proceedings are invoked, market participants are usually asking for trouble. It comes down to very basic logic: if a business was performing somewhat decently, such a desperate move would not be necessary.
After all, while bankruptcy protection has its benefits – namely, staying in business – the process carries significant costs, such as myriad filing and legal fees. Additionally, the affected company may be on the hook for several years, paying off debt, which can sometimes lead to massive sacrifices, such as asset sales.
Unfortunately, Revlon may not have had much choice in the matter. Management primarily cited liquidity constraints stemming from global supply-chain disruptions and the rapid rise of inflation as the cause of bankruptcy.
However, the firm also suffered from a competitive onslaught, particularly from celebrity-backed cosmetic products. Facing outside and industry-specific headwinds, Revlon saw few options available.
Nevertheless, the incredible bearishness attracted the attention of meme-stock traders, who saw yet another opportunity to disrupt Wall Street bears. To be completely honest, the narrative for REV stock isn’t 100% speculative (though it may be at least 90% so).
Revlon’s Smart Score Rating
On TipRanks, REV stock scores a 5 out of 10 on the Smart Score spectrum. This rating indicates that the stock isn’t too likely to outperform the market, going forward.
The Crazy Bullish Narrative for REV Stock
Again, with the caveat that REV stock is not appropriate for most market participants, the underlying “investment” isn’t completely devoid of a fundamental catalyst. True, the COVID-19 pandemic pushed this troubled business into the depths of Sheol. Though unintuitive, it’s also the global health crisis that might offer Revlon very longshot odds of becoming a phoenix.
Essentially, the framework comes down to the incentivization of personal and beauty care in a post-pandemic paradigm. According to data from the American Psychological Association, a survey from February 2021 discovered that 42% of U.S. adults reported unwanted weight gain. Among this cohort, the average weight gain was 29 pounds.
Naturally, work-from-home initiatives and government mandates created an environment that enabled a sedentary lifestyle. Further, the replacement of in-person meetings with emails and conference calls meant that worker bees could conduct their operations while wearing pajamas.
Under this ecosystem, it’s no surprise that REV stock suffered. Indeed, if you look at its five-year price chart, you’ll notice that REV never came close to challenging its pre-pandemic trading levels.
However, an increasing number of high-level companies are expressing concerns about work-from-home privileges, namely that they lead to workers abusing said privileges. Presuming that companies start recalling their employees back to the office, beauty care demand could rise exponentially, thereby benefitting investments like REV stock.
A Big Mess Otherwise
To summarize the longshot bullish narrative of REV stock, the underlying company’s bankruptcy protection filing gives the business time. Obviously, its main priority is to shore up its financial profile. However, the time element could be constructive if, for instance, companies accelerate demands for their workers to return to the mothership.
Still, anyone uncomfortable with the high probability of losing money should be leery about REV stock. While extending maximum respect to the meme-stock community for sparking radical reversals in troubled organizations in the past, Revlon’s challenges are severe.
One of the biggest problems within the cosmetics firm is its balance sheet, which is frankly horrible. Its cash-to-debt ratio barely registers above zero, ranking worse than approximately 94% of corporations in the consumer-packaged goods industry. Further, the multiple of its debt to EBITDA is over 12.5x, far greater than the median 2.4x multiple within the sector.
On the income statement, Revlon posted revenue of $2.08 billion in 2021, representing a gain of over 9% from the prior year’s result. However, the tally is below the annual sales posted between 2016-19.
More problematic, Revlon hasn’t posted positive net income since 2015. So, if the aforementioned bullish narrative is to pan out, it must do so rather quickly.
Wall Street’s Take on REV Stock
According to TipRanks’ analyst rating consensus, REV is a Hold, based on no Buys, one Hold, and no Sell ratings. The average Revlon price target is $8.50, implying 47.83% upside potential.
The Takeaway: REV Stock is Only for the Bold
To be completely forthcoming and transparent, REV stock is only appropriate for the bold. Usually, shareholders of bankrupt firms get wiped out once new shares are issued post-bankruptcy. That’s a good warning sign to not get involved with Revlon.
However, for those that don’t want to take a trip to Las Vegas but still want to gamble, REV stock might offer some entertainment value. That’s because the narrative supporting Revlon isn’t entirely based on ludicrous memes.
