UBS: Time To Sell Avon, Stock Has At Least 27% Downside

• Avon Products, Inc. AVP shares have lost 44 percent in the last three months, and are trading close to the lower end on their 52-week range of $3.18 - $10.65.
• UBS analyst Stephen Powers downgraded the rating on the company from Neutral to Sell, while reducing the price target from $5.50 to $2.50.
• The company is in need for significant change and reinvestment, but may not be able to adequately fund this, Powers said.

Avon’s 3Q results were again short of expectations. The company reported an EPS of -$0.11, significantly short of the UBS estimate of $0.07 and the consensus expectation of $0.08. Avon has also delayed its strategy update to January 21.

Analyst Stephen Powers believes that the company is “trying to solve an increasingly complex puzzle.”

He explained that the environment in which Avon is operating is not conducive to growth, and the only credible solution appears to be unexpected macro improvement and/or positive ROI reinvestments, although it seems unlikely that the company would be able to adequately fund this.

Powers mentioned that there were 3 core concerns:

1. Lack of clarity around Avon’s forward strategy – The company faces difficult choices like whether to maintain the declining status quo, or make sizeable reinvestments that would reduce earnings for the next few years
2. Rising probability of a dividend cut as well as the possibility of an equity issuance
3. Likelihood of the macro environment continuing to soften, especially in Brazil

The current valuation of Avon’s stock is not justified, given the risks the company faces, Powers said, while adding that the current price target reflects “expectations of reduced/delayed organic growth, more significant reinvestments, and a dividend cut to fund a portion of these reinvestments.”