TSC Ratings' Updates: Avon

The following ratings changes were generated on Wednesday, Nov. 5.

We've downgraded beauty-product maker Avon Products(AVP Quote) from buy to hold. Strengths include its impressive record of earnings per share growth, compelling growth in net income and revenue growth. Weaknesses include a generally disappointing performance in the stock itself and generally poor debt management.

Avon reported significant earnings per share improvement in the most recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year, and we feel that this trend should continue, suggesting improving business performance. During the past fiscal year, Avon increased its bottom line by earning $1.22 vs. $1.05 in the prior year. This year, the market expects an improvement in earnings to $2.16. Net income increased by 60% over the same quarter last year, to $222.6 million, exceeding the average net income growth of the S&P 500 and but less than that of the personal products industry.

The debt-to-equity ratio is very high at 2.28 and currently higher than the industry average, implying very poor management of debt levels within the company. Avon also has a quick ratio of 0.63, demonstrating the lack of ability of the company to cover short-term liquidity needs. Shares are down 33.48% year over year, apparently dragged down in part by the decline we have seen in the S&P 500. But don't assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, Avon is still more expensive than most of the other companies in its industry.