Citi: Buy Avon Despite Risk

• Shares of Avon Products, Inc AVP have declined steadily in 2015 and are down 70 percent year-to-date.
• Citi’s Wendy Nicholson upgraded the rating on the company from Neutral to Buy, while raising the price target from $3.50 to $5.00.
• Avon’s core business is stabilizing and the company is expected to reinvest funds to boost growth, Nicholson stated.

Avon’s core business has shown some signs of stabilization in recent quarters in terms of flat organic revenue growth and stable underlying operating margins. A recent visit to the company’s Brazilian operations revealed a business that “was not quite as unhealthy as we had expected to be,” analyst Wendy Nicolson mentioned.

At the upcoming Investor Day on January 21, Nicolson expects Avon to outline its plans to fund reinvestment in the business in order to reaccelerate growth and profits.

Possible further currency devaluations in Brazil and Argentina and the consequent forex headwinds, along with the expected increase in investment spending, are expected to exert pressure on Avon’s 2016 earnings.

“At a minimum, we expect visibility, predictability, and consistency of both sales and earnings at Avon to remain very weak for some time to come. As such, we expect the stock to potentially remain highly volatile,” the analyst stated.

Nicholson believes that liquidity concerns relating to Avon appear overblown at this point, especially as the company is expected to suspend its dividend in early 2016 and has no debt pay-down requirements until 2018. “[We] are optimistic that this current valuation for the stock may have limited downside,” the Citi report added.