Avon's Calling, but Will Higher Profits Push Investors to Open the Door?

NEW YORK (TheStreet) -- Lately it's been ugly for shares of Avon Products (AVP). At Monday's close, the stock was at $14.69, down nearly 15% for the year to date and over 29% for the past 52 weeks. It pays a 1.64% dividend yield.

That's not pretty. But if you like "ugly ducklings turning into swans" stories, this may be your stock. Management at the direct seller of cosmetics wants to give you a reason to buy the shares. Yes, the stock is a gamble. But there are a few good reasons investors should consider it.

First, Avon has been working at reducing its costs in the face of lagging sales. Monday the company announced that it will cut another 600 jobs to save on costs. Most of those layoffs will come from its corporate organization and its North American business. Avon had 36,700 employees at the end of 2013.


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Avon is also trying to rebound from an ugly past when the company, under former CEO Andrea Jung, was accused by the U.S. Justice Department of bribing Chinese officials. In 2006, Avon was among the first companies to obtain a license to sell its products directly to Chinese consumers. In May the company agreed to pay a $135 million settlement.

Second, the company has been refocusing on profitable areas and away from soft markets.

In 2012, Sheri McCoy, a former vice chairman at Johnson & Johnson (JNJ) was named CEO. Since taking over the helm, McCoy has refinanced debt and improved overall cashflow. Besides the settlement, she took the company out of unprofitable markets in South Korea, Vietnam and Ireland.

What hasn't changed is Avon's diverse product line of cosmetics, fragrances, fashion, and skin care and home products for women and men. It is one of the world's largest direct sellers, with over 6 million active, independent sales representatives.

Third, Avon has been extending is global reach -- with markets in over 100 countries. Latin America is its largest market, accounting for 50% of its sales. Brazil alone accounts for 20% of sales overall. Africa, Europe and the Middle East together make up 30% of sales. North America and Asia account for the remainder of sales.

There was a time when the Avon Lady was ubiquitous in North America. That is no longer the case. In 2013, Avon had a $48 million operating loss in North America.

Fixing its business in North America is an integral part of McCoy's plan to turn Avon around, starting with hiring Pablo Munoz from Tupperware Brands (TUP) to head the North American Division.

With a market capitalization of $6.49 billion, Avon has estimated 2014 earnings per share of 81 cents and 2015 EPS of 98 cents. In 2008, earnings peaked at $2.13.

Analysts feel that if McCoy is successful, EPS should reach $1.40. At that level, Avon shares could sell at $25 per share, a 70% gain over current share price.

Avon may be a plain Jane right now, but with a makeover it could be a beauty queen in the making.


Now as a counterpoint, let's look at TheStreet Ratings' view of Avon. It's the polar opposite view.

TheStreet Ratings team rates AVON PRODUCTS as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AVON PRODUCTS (AVP) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Personal Products industry. The net income has significantly decreased by 1128.5% when compared to the same quarter one year ago, falling from -$13.70 million to -$168.30 million.
  • Although AVP's debt-to-equity ratio of 2.96 is very high, it is currently less than that of the industry average. To add to this, AVP has a quick ratio of 0.70, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Personal Products industry and the overall market, AVON PRODUCTS's return on equity significantly trails that of both the industry average and the S&P 500.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 34.90%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 1166.66% compared to the year-earlier quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • AVON PRODUCTS has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, AVON PRODUCTS swung to a loss, reporting -$0.01 versus $0.21 in the prior year. This year, the market expects an improvement in earnings ($0.80 versus -$0.01).

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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