Speculators Can Call on Avon

11/14/2014 6:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

I am doubling down on this stock idea; importantly, note that "double down" is a gambler's term. I use it because this position is speculative, cautions Jack Adamo, editor of Insiders Plus.

The Q3 earnings report from Avon Products (AVP) was very encouraging in some aspects, but left a lot of questions unanswered. While revenues were down 8%, that was entirely due to the change in exchange rates caused by the very strong US dollar.

Elsewhere on the income statement, operating margins improved dramatically from 2.9% last year to 8.8% this year, although there's still plenty of room for improvement there.

Analysts expect adjusted earnings for the year to come in at $0.83 this year and $0.90 in 2015. We're looking at a stock selling at 12-times this year's earnings with upwards of 8% growth expected next year. 

Avon's performance in the last few years deserves a discount, but I think it has gone too far now.

The biggest question with Avon is not with finance, but with operations. Units sold were down 4% year-over-year and so were the number of active representatives. On the other hand, average order size rose 5%.

The new CEO, Sherilyn S. McCoy, is now in her second year in the job. She believes she has the people and methods in place to increase the number of effective representatives, which would solve the units problem.

However, some analysts on the latest conference call were nipping at her heels about why the turnaround wasn't further along. I'm not in that camp.

You can't turn around an operation of this size on a dime. From what I've seen so far, I think McCoy is heading in the right direction. I'm inclined to give her the benefit of the doubt.

We should also remember that the company got a buyout bid in the $21 range less than two years ago. I'm sure that offer would be less today, however, there has been buying by a few large value-oriented investment firms over the last few months.

If the CEO doesn't appear to be righting the ship within the next few quarters, I think activist investors will make their presence felt. That could result in actions to monetize shareholder value.

In other words, there would be pressure to sell the company. That alone would boost the stock price. My feeling is to stick with the CEO for now.

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