Is a turnaround finally in sight for troubled Avon?

By Simon Pitman contact

- Last updated on GMT

Is a turnaround finally in sight for troubled Avon?

Related tags: Stock

After several years of steep decline for one of the biggest cosmetic players in the world, a positive rating from Citibank has sent stock prices surging amidst renewed hopes of improvements.

Citigroup raised its outlook from “neutral” to “buy” yesterday, pushing share prices up by almost 10% to close at $3.11, although share prices have been hovering at historical lows.

Citigroup also increased its estimated target price for the company’s shares, raising it from $3.50 to $5.00.

In the investor note accompanying the new rating, Citigroup said its analysts had visited the company’s Brazil operations – one of its biggest markets, giving it reason to believe that its business operations there will soon show signs of recovery following recent tax hikes and a currency devaluation.

Restructuring and cost savings about to pay off?

Citigroup also believes that restructuring and cost saving measures will mean that the company’s business operations will show real signs of stabilizing in the coming quarters, and is tipping that Avon executives will be revealing the first signs of the recovery early next year.

The Citibank rating could lead to a number of other analysts upgrading their outlook soon, but there are signs of caution too, with the team at online investor resource The Street maintaining its rating for the company at “sell”, accompanied by a ‘D’ score.

Here is what The Street team had to say about its current ratings:

“This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.”

The last few years have weathered Avon, highlighted by the fact that sales during the last financial year fell by more than 20% and together with the business losing its place as an S&P 500 business.

Speculation has been mounting over what steps the company will take in the future to shore up its dwindling cash reserves and mounting debts. The company has been reportedly in advanced negotiations with private equity companies, but nothing concrete has come from that.

Recent results showed currency headwinds remain a challenge

Avon’s most recent third quarter financial results showed that the company was facing significant challenges in the light of challenges in the Brazil market, as well as a significant impact from currency translations.

The company reported that net sales during its third quarter were down 22% to $1.7bn, which translated into a 2% decline in constant dollars, underling a massive hit from currency translations that totalled 20%.

The big sales decline also impacted net profits significantly, which were down from a small profit of $92m in the corresponding period last year, to reach a loss of $697m for the quarter.

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