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Can Avon's (AVP) Transformation Plan Drive Q4 Earnings?

The performance of an industry generally reflects the performance of its native stocks. However, this may not always be true. This seems the case with Avon Products Inc.AVP , which has been delivering solid returns of late, despite the troubles faced by the Zacks categorized Cosmetics & Toiletries industry.

The leading global beauty stock seems to be in the recovery mode after being in a rough patch for quiet sometime due to back-to-back dismal quarterly performances. Though the company's surprise trend is yet to recover, we believe optimism is creeping into Avon's stock performance on account of the progress on its Transformation Plan that was announced in Jan 2016.

With its Transformation Plan, the company targets bringing down costs over the long term and investing these savings back into growth initiatives like media, IT systems and social selling. Additionally, it anticipates this plan to help attain its long-term goal of delivering low double-digit operating margin and constant-dollar revenue growth in the mid-single digits.

Evidently, the company's shares have surged about 11.2% in the past six months, substantially outperforming the Zacks categorized Cosmetics & Toiletries industry that declined 22.4% in the same period. Further, the company has also outpaced the performance of the broader Consumer Staples sector that delivered a negative return of 4.6% in the last six months.

Per the Earnings Preview report dated Feb 3, Consumer Staples sector is likely to witness earnings growth of 9.7% and revenue increase of 4.1%. Let's take a closer look as to how Avon is expected to contribute to the sector's performance.

Despite the solid stock performance, the big question on investors mind at this time is whether Avon will manage to deliver an earnings beat when it reports fourth-quarter 2016 results on Feb 16.

Which Way Are Estimates Trending?

A look at Avon's earnings estimates revisions shows that the Zacks Consensus Estimate for the fourth quarter and full-year 2016 has remained stable for over 30 days. A comparison with the year-ago period reported earnings reveals that the Zacks Consensus Estimate of 10 cents per share for fourth-quarter 2016 reflects a substantial growth from break-even results reported in the prior-year quarter. Also, the estimate of 13 cents per share for 2016 compares with earnings of 1 cent per share in 2015. Analysts polled by Zacks expect revenues of $1.63 billion for fourth-quarter 2016, reflecting a 1.13% growth from the year-ago quarter.

Are These Factors Enough to Gauge an Earnings Beat in Q4?

Looking back its earnings beat trend, we are a little disappointed though. We note that Avon is yet to rebound from its waning top-line and bottom-line trend. The company underperformed the Zacks Consensus Estimate in the preceding quarter, delivering a negative surprise of 33.3%. Marred by adverse currency headwinds, the company has reported lower-than-expected earnings in four of the trailing five quarters. In the trailing four quarters, Avon missed the Zacks Consensus Estimate significantly by an average of 112.5%.

Avon Products, Inc. Price and EPS Surprise

Avon Products, Inc. Price and EPS Surprise | Avon Products, Inc. Quote

Further, the stock movement has moderately reversed ahead of the fourth quarter 2016 earnings release. The stock witnessed a 3.4% decline in the last five days. Let's see what the Zacks model says,

Our proven model does not conclusively show that Avon is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. Avon has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 10 cents. You may uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

However, the company carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. But, this combined with Earnings ESP of 0.00% is not enough to make us confident of an earnings surprise in the upcoming quarter.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

The Gap Inc. GPS , scheduled to report earnings on Feb 23, currently has an Earnings ESP of +2.22% and a Zacks Rank #3.

Costco Wholesale Corp. COST , slated to report earnings on Mar 2, currently has an Earnings ESP of +0.74% and a Zacks Rank #3.

Dollar Tree Inc. DLTR , expected to release earnings on Mar 7, has an Earnings ESP of +0.75% and a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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