Insiders Plus Calls on Avon

07/14/2014 7:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo looks at a global consumer products company that is in the midst of a turnaround. In his Insiders Plus newsletter, he reviews the outlook for the door-to-door retailer.

Avon Products (AVP) slid after announcing it was cutting 600 jobs. This is a miniscule percentage of its more than 36,000 employees, and the cuts are primarily in middle management, which is where all companies are a little corpulent.

So, this really means nothing. It just happened when the market was in a bad mood. If the announcement had been made on an up day for the market, shares would have risen on the assumption the cost-cutting was a good thing.

In fact, it was. It will result in a $50 million pre-tax charge this year, but will save that much or more in future years. Avon also is reviewing operations in smaller, underperforming markets to be restructured or closed, and expects to save $400 million a year by 2016.

The big question here is the same as it is in the rest of the market. Will the savings be enough to offset the weakness in the world economy? I think there's a good chance it will, since Avon's face-to-face business model and affordable quality should serve it well in tough times.

Avon is not out of the woods yet, however, the stock seems to be forming a good base with modest, steady upward momentum.

This, of course, is no guarantee the stock will perform well in the long-term. That depends on how well the company executes its turnaround.

However, the stock is cheap enough and the basic value of the business is solid enough that there's plenty of upside potential.

We are simply trying to buy at a point that allows us to profit handsomely if it meets our expectations. With the stock very near a 14-year low and all of its problems out in the open, I like the risk-to-reward here.

We are increasing our stake for now. If the market starts to get dicey, we may cut back and keep the first position as a core holding. I'm raising the buy range for this position. Buy Avon Products up to $15.50.

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