Last week on fast money I recommended Avon ticker (
) as my final trade as my thoughts into (yesterday's)earnings
were this was a company that was slowly but steadily reversing
years of poor client focus, getting more efficient, and slowly
moving down the road on settling onerous Federal bribe charges
and potential SEC penalties as well.
I believe that CEO Sheri McCoy is overseeing a turnaround that
will be steady if not spectacular and this is some of the
cheapest exposure to the emerging market middle class consumer
relative to other global emerging market (GEM) players who have
had a tremendous 3yr run. I was very wrong on my
timing. Yesterday the stock traded down -21.9% on monster
volume (about 20X avg 30d vol).
Yesterday Avon released third-quarter numbers that fell short
on the sales line primarily in North America but the headline
grabber was that the SEC was threatening larger than expected
penalties to reconcile a long running bribery probe.
With the move in the stock you are now back to levels where
the stock traded before ripping 20% higher on fiscal 4Q
earnings. You are also at key support level that goes back
to Dec '11.
While the company appropriately used words like "material" to
describe the Federal and SEC penalties they are facing, Avon is a
$7.6 billion (even after yesterday's plunge) with $2.3 billion in
revenues last quarter. Solvency is not the issue.
When analyzing Avon after yesterday's move know that a cheap
stock got cheaper. Avon's multiples ( 9.2 times 'e13 PE and
0.92 X P/S) are major value relative to the broader GEM consumer
space. And while North American sales were disappointing and
overall sales in the main beauty business were -9%, the company
has been enormous upside leverage to consumers outside of North
America and this growth path is where the company is focused.
More than 80% of the company's revenues come from outside of
North America. Latin America is more than 50% of sales.
It's still too early in Sheri McCoy's turnaround plan to
determine whether she is broadly succeeding in turning around
Avon but this is what we like to call a transformational story
where there could be a long term structural investment call...IF,
you believe they can get past the regulators. The core
business is well positioned.
With the caveat that this is a company with significant risks
around it, this is a position I would add to at these levels.