Avon Products: Zacks’Bear of the Day Play

Avon Products (AVPAnalyst Report) is global beauty company, with about $9 billion in annual revenue. The company is the world’s largest direct seller (door-to-door) with more than 6 million active independent sales representatives.

Avon products, which are available in over 100 countries, include color cosmetics, skincare, fragrance, fashion and home products.

Disappointing Results 

The company reported its Q3 results on November 1. Adjusted loss for the quarter was $0.11 per share compared to earnings of $0.23 per share reported a year ago. The Zacks Consensus Estimate was of earnings of $0.07 per share. The company has missed estimates in three out of last four quarters, with an average negative quarterly surprise of 66%.

Total revenue for the quarter plunged 22% year over year and dropped 2% on constant currency basis, with a significant fall in North American revenue offset by strength in Europe, Middle East & Africa and Latin America.

Partnership with Cerberus Capital Management

Last month, Avon announced a strategic partnership with Cerberus Capital Management. According to the deal, Cerberus will make a $435 million investment in Avon. This investment will be in the form of convertible perpetual preferred stock. Further, Avon North America operations will be separated from Avon Products into a privately-held company majority-owned and managed by Cerberus. The transaction is expected to be completed in the spring of 2016.

Falling Estimates

After disappointing results, analysts have been revising their estimates lower for the company. Zacks Consensus Estimates for the current and the next year are now $0.11 and $0.32 per share, down from $0.34 and $0.45 per share, before the results. Declining estimates sent the stock back to a Zacks Rank # 5 last week.

Better Play in the Industry?

The Cosmetics industry is currently ranked 154 out of 265 Zacks industries (bottom 42%). Investors looking for exposure to this industry could consider Estee Lauder (EL), which currently enjoys a Zacks Rank of 2 (Buy).

The Bottom Line

Avon’s turnaround efforts have not been working so far. It remains to be seen whether the deal with Cerberus will be able to increase shareholder value. The company has been suffering over the past few years due to poor execution strategy and underinvestment. Investors should therefore avoid this stock till there is improvement in the outlook.

In addition to the Zacks Stock Rank of 5, the stock has a Zacks Style Score of “F” for Momentum and “D” for both Growth and Value.

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