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Avon Products Hits 52-Week High: Will the Uptrend Continue?

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Avon Products, Inc. is striking all the right chords, apparent from its bullish run on the bourses. In fact, the stock hit a new 52-week high of $4.66 on Sep 13, before closing the session a tad lower at $4.58. The company is benefitting from synergies related to Open Up Avon strategy and focus on e-commerce expansion.

Notably, shares of the company have surged roughly 18.9% in the past three months. In the same time frame, the S&P 500, the Consumer Staples sector and the Zacks Cosmetics industry rose 3.8%, 1.7% and 4.8%, respectively.

Is There More Room for the Stock to Run?

Usually, stocks that reach 52-week high are perceived as appropriate investment picks. However, investors often wonder if the stock is overpriced considering the high price level. While the apprehensions are not absolutely baseless, all stocks reaching 52-week high are not necessarily overpriced. A brief glance at some valuation metrics seems to indicate that this Zacks Rank #3 (Hold) company has enough room to scale higher. Further, a Value Score of A also substantiates its growth potential.

Avon Products with a price-to-sales (P/S) ratio of 0.4 compared with that of the industry’s 3.2 indicates that the stock has enough upside potential. The stock also looks attractive with respect to a forward price-to-earnings (P/E) multiple of 28.6x versus the industry’s 32.3x. A more or less similar picture emerges when comparing EV/EBITDA ratios. Avon Products holds the edge here with an EV/EBITDA ratio of 10.8, which is lower than 21.5 of the industry.

Certainly, an attractive valuation and sound fundamentals make this stock that should be retained for now.

A Brief Introspection

Avon Products is on track with the "Open Up Avon" strategy that will reposition the company back on growth trajectory. This strategy mainly focuses on reviving direct selling business, renovating the brand, enhancing e-commerce and other capabilities to facilitate performance-driven transformation. As part of the plan, the company expects to improve operating efficiency, lower inventory levels and reduce portfolio complexity through restructuring efforts. These initiatives include 25% decline in Stock Keeping Units (SKUs), 15% reduction in inventory levels and 10% job cuts.

Driven by the "Open Up Avon" strategy, the company is committed to attain long-term financial targets for 2021. It intends to generate total cost-savings of $400 million by expanding manufacturing and distribution, outsourcing efficiencies, zero-based redesigning of back office functions, reducing certain facilities as well as managing revenues, interest and tax. In addition, management expects to invest nearly $300 million in commercial, digital & IT infrastructure projects.Through this strategy, the company expects to achieve revenue growth of low-single digits and margin expansion of low double-digits by 2021.

Further, it is capitalizing on the growth opportunities in the fast-growing e-commerce realm, hence making this platform a major growth driver. The company is committed to improve digital tools and e-commerce channel for bolstering Average Representatives sales. Its new Avon ON app, which is an end-to-end solution to aid the Representatives, is currently available in 18 markets. In fact, this app is a 100% mobile tool and incorporates all the services in a suitable place to simplify as well as expand the Representatives’ business.

Further, ‘My Avon store’ is accessible across 27 markets, while digital Avon brochure is now available in all markets. Backed by all these initiatives, the company is steadily expanding the percentage of sales through the online channel. In fact, Avon Products expects to double e-commerce sales in 2019.

On the flip side, Avon has been grappling with dismal sales trend in the last few quarters due to impacts of adverse currency and decline in the Representatives across segments. Notably, second-quarter 2019 marked the company’s third straight sales miss. The company’s EMEA segment is displaying soft trends due to significant challenges in Russia, a declining beauty market with intense competition and weaker sales leader engagement. Currently, the company is focused to revive its business in Russia through increased training, brochures upgrade, product innovations, direct delivery to customers and expansion of digital business.

Bottom line

Having said that, we expect all aforementioned factors to offset these hurdles and help Avon Products sustain its bottom-line momentum.

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