While Avon's Still Pretty, Consumer Goods Are Getting Ugly

Avon Products’ (AVP) stock rose almost 20 percent last week thanks to strong second quarter earnings. The venerated woman’s beauty products company’s reported earnings are proof that its 2005 turnaround plan is finally paying off. However, because of the stock’s run-up last week, we now rate AVP a Hold and would be cautious on the stock and the entire consumer goods sector at the present time.

AVP’s second quarter got a strong boost from emerging markets—particularly in Latin America and Russia. Profit for the quarter more than doubled, which surpassed analysts’ estimates. Wall Street had expected Avon to earn 47 cents per share for the second quarter. However, last Wednesday, the company announced actual second quarter earnings of 55 cents per share. Earnings reached $235.6 million, while earnings from 2007’s second quarter were just $112.70 million. Revenue rose 17% to $2.74 billion. Avon’s boost from international sales was aided by the dollar’s current weakness against foreign currencies helping the company’s products compete in its overseas markets. (See earnings call transcript.)

CEO Andrea Jung also sees the benefits of an aggressive turn-around plan that was implemented three years ago. The company is holding the line on costs, while spending more to attract sales representatives. The number of active representatives climbed seven percent and better training and compensation for them resulted in a 19% increase in sales of beauty products. Robust sales growth in Russia and Brazil and many other emerging markets offset tepid sales growth in North America. The company maintains that growth in emerging economies will continue to boost the company’s fortunes for the balance of 2008, despite a grim U.S. economic environment.

Ockham Research’s calls on AVP have proved quite prescient. We now see the stock as a firm Hold as its recent price appreciation has pushed it into over-valued territory. AVP’s historic price-to-cash flow range is 15.53 – 22.81, while the stock currently trades at 16.32x. Its price-to-sales historic range is 1.46 – 2.19 and it is currently at 1.676x. At $43 per share, the stock has little immediate upside potential, but could be vulnerable on the downside should the coming quarters prove more difficult than expected.

Much of the benefits conferred by the weakness in the dollar are probably behind AVP, particularly if the dollar begins to rally against other currencies in the weeks ahead. Furthermore, if strong growth in the emerging markets begins to slacken, as some analysts expect, then Avon’s second quarter performance may be hard to match. Lastly, Ockham believes that the entire Consumer Goods sector of the economy is unfavorably valued relative to other sectors at the present time. For stock investors, if Avon comes calling at present, you might want to look elsewhere for more compelling value.

Comments

[droopydro:]

WHO benefits from such a smart business plan in 07-08: loyal US shareholders and women's self-employment,confid... and
pocket books; it is WIN all the way round of course. Plus it is loner in the market; a self perpetuation machine with a future, chart that! REALLY great products, tv spots, and venerable (not a beauty product word).
thanks for the eyeopener this am.

2008 Aug 14 10:43 AM