Inside Wall Street: Has Avon hit bottom?
Don't count on it. Things could get uglier for the world's largest direct seller of beauty products.
Instead, the world's largest direct seller of beauty products could become the next Research In Motion (RIMM).
Many investors had incorrectly assumed RIMM was the perfect technology bargain when the stock started to fall. What happened instead was the stock just kept falling, to a level where the downside momentum got worse. RIMM has crashed from $68.35 on Feb. 12, 2011, to a low of $7.26 on July 13, 2012.
Meanwhile, Avon's stock has tumbled from $35.41 on Oct. 13, 2010, to a low of $15.24 on July 13, 2012. Some optimists think Avon may have hit bottom and is possibly now a great bargain.
But a number of investment pros don't agree, including S&P Capital IQ, which has downgraded Avon to "sell" from "hold."
"On a multiple analysis, we cut our target price to $14 a share from $21," says Esther Kwon, an S&P analyst who has reduced her 2013 estimated earnings by 11 cents a share, to $1.10. One of her concerns is the continuing global economic weakness and lower growth prospects in Avon's largest market, Brazil. According to Kwon, its biggest competitor there has been reinvigorated after making significant investments last year. She sees an increased risk of a dividend cut in 2013.
In hindsight, Avon should have accepted Coty's unsolicited offer to acquire the company for $23.35 a share in April. Avon's stock has dropped significantly since it rejected the offer.
Avon's problems with government regulators are also a concern. The SEC review of a potential violation of the Foreign Corrupt Practices Act and a subpoena from the agency in connection with Regulation Fair Disclosure are complicating efforts by Avon's new management to turn the business around and "acting as an overhang on the shares," Kwon says.
She estimates Avon will earn 83 cents a share in 2012, well below last year's $1.63, excluding restructuring and other one-time charges. With such depressed earnings, its yearly dividend of 92 cents a share may not be sustainable, since the projected 2012 per-share earnings are much less than the payout.
Avon has operations in 65 countries, and its products are distributed in 42 other countries. Latin America accounted for 45% of sales and the U.S. about 19%. Western Europe, the Middle East and Africa combined generated 14% of total sales, while the Asia-Pacific accounted for 8%.
In an effort to cut overall costs and adjust to lower demand for its beauty, fashion and home products, Avon has reduced the number of its sales representatives worldwide. The number in the Asia-Pacific has been reduced by 11%, North America by 8% and in Western Europe, the Middle East Africa by 2%. Only Latin America got a boost, with a 3% increase.
Avon has been trying to rejuvenate worldwide sales since 2005, when it started a restructuring program focused on revamping its global chain operations, streamlining various parts of its operations and cutting overall operating costs. The massive effort hasn't succeeded in achieving its goals, however, with total sales remaining sluggish, ranging from $8.9 billion in 2007 to $120.8 billion in 2010. Sales did increase in 2011, to $11.2 billion, but S&P estimates that sales will inch up only to $11.5 billion in 2012.
"Although sales were strong in the Latin America and Western Europe, Middle East and Africa regions at the beginning of 2011, they slowed dramatically in the second half of the year, and we expect sales to continue to struggle in 2012," Kwon says. With the challenging comparisons in the first half and recent slowdown in sales momentum, Kwon assumes operating margins narrowed in the first half of 2012.
The analyst sees sales in the U.S. rising by just 1% in 2012, and China won't be much help either. Kwon says China appears to be having difficulty transitioning from beauty boutiques to the now permitted direct-sales marketing system.
Is it too late to short or sell the stock now that it has fallen so much already? Maybe, since the stock is already close to S&P's reduced price target of $14 a share. But it surely isn't a buy right here, unless you know something the pros don't -- like Coty coming back at this depressed price to relaunch a takeover bid.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Stick to the topic about " Avon" This is not " The lonely hearts" message board. Avon has been around a very long time and if you do not change a little bit Evey now and then and bring a "bang" feature to bring it all up to the modern times, you will fail. I think makeup is made by so many companies now it makes it very hard. although they do sell other items but so do many of the stores. alot of "competition" out there.
The people can only ask so many tiems to get people to buy and if they will not do it then it is time to come up with new products that 'wow" the people as it is not anything like waht they are seeing or they will become bored, as they see so many and they know Avon is about the same as it always was and now they maybe want some changes?
Just a thought on this subject. and easy thought truly, anyone could think of this to make it work.
Perhaps, a glimmering ( some are and some not)
A makeup that works for you for a long time, and you can take it off somehow with a certain product but otherwise once you get it just as you want it, it will last for days and days without causing any problems to lips , eyes or where ever it is placed?
Some really special and Neon looks, would maybe work, and yet keeping the sedate look and the other products is for those who really do not want to have it changed. People want to look like the stars on TV now so we must find makeup they can do so they look just like all those people they see in commercials without knowing how to put it on, but some how have items to help them make it go on properly?
Well who am I to even think of things, but just in case someone reads it who can think of ways to make it work out chemically speaking, this might give them a little edge for a time anyway.. If they want it?
I have been selling Avon for 45 years and using it.I understand the frustrations quoted about the things they discontinue. I am too but most of the time the product is either improved or the packaging is changed. Granted some of the products are a bit pricey but I make sure my clients can afford it by lowering prices. Don't give up on Avon, like every other company it has its ups and downs.
to the woman who couldn't find her perfume any more. Contact me I may have it. ldybtrfly53 at yahoo dot com.
I don't know if Avon's stock has hit bottom or not. What I DO know is that their products work! If you're over 35 & haven't used their ANEW line, you should consider giving it a try. At 61 my skin is better than it's ever been. The little wrinkles have disappeared.
I don't intend to age gracefully...I plan to fight it every step of the way! AVON is how I'm doing it.
When I invest I try to look at what a product really is... Avon isn't worth investing in because it is going away. Women at my work try to sell the products, but they are so cheap and crappy they can't sell them. I would not invest in Avon, because Avon made poor decisions, and now it is done.
Hey, MSN, 16 of these posts are SPAM!!!!
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I have used Avon for yesrs. I love thier beauty products & the prices even more! You would think that in this economy, the business would be doing better with people looking for lower priced alternatives. However, there are several things that could be improved upon. I honestly have never seen an advertisement for Avon. The constantly are discontinuing products. They sell way too much junk like house wares, clothing, jewelry, and kids toys. My Avon rep is great, but I've had some in the past who didn't return calls or emails and took way too long to get product delivered. For this reason, I usually just buy online & have it delivered by mail.
Avon just doesn't know what it wants to be. I prefer to go to Walgreens and get some Revlon or Black Radiance. It wasn't always that way though. Avon used to be worth the effort.
Don't expect Mary Kay to bite the dust anytime soon. It's not a publicly traded company, for starters.
Products only continue to get better, backed by years of research and development, and with price
points that are reasonable (and usually better than department store brands) Markets continue to
expand, as does the sales force. Mary Kay is also, no more a pyramind than Avon is. You can
choose to build a team, but I make adequate profit from just selling my product (though I do have
4 downline consultants)
Incidentally, if you need product quickly, go to the consultant locator at marykay.com and put in your zip code. Believe me, it won't take long to have someone standing at your door with the product you need.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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