Avon’s 20% Plunge: What Now?

You don’t have to go door to door to find dismal news about Avon (AVP) today. Between the stock tanking over 20% and the company's announcements of a weak third-quarter topped with news that federal regulators are increasing the penalties to resolve its ongoing bribery probe, it's one ugly afternoon for the beauty product and cosmetics company.

The Wall Street Journal's Serena Ng and Anna Prior recapped Avon's woes nicely this afternoon:

The government’s position, disclosed by Avon in a regulatory filing, adds another big weight on a company already struggling to turn around a string of poor results. On Thursday, the door-to-door seller of makeup and consumer products reported a third-quarter loss following a steep drop in sales in the U.S. and China.

Regarding the bribery probe, the WSJ writes:

Avon has been trying to resolve a federal bribery probe that has dogged it since 2008 and has already racked up roughly $340 million in legal and related costs. The company is in talks with the Securities and Exchange Commission and Justice Department to settle an investigation into whether Avon breached the Foreign Corrupt Practices Act by providing gifts or making payments to officials in China and other countries to get licenses to sell its products.

Analysts were mixed-to-negative in reaction to the news, revising their recommendations and slashing price targets. Rommel Dionisio of Wedbush, for one, cut the price target to $21 from $24, writing:

Avon reported third-quarter revenue of $2.323 billion and adjusted earnings-per-share of 14 cents, again short of consensus forecasts of $2.443 billion and 19 cents, respectively. Overall local currency sales fell 1%, sequentially worse than the 2% growth seen in the second quarter, as sharp declines in North America (18%) and Asia-Pacific (19%) were partially offset by growth in Latin America (6%).

We believe shares of Avon should trade at a 5%-10% discount to the peer group average. Such a discount implies a 2014 estimated price-to-earnings multiple of 17 times.

Wendy Nicholson of Citigroup considers the news to be a  "step back," noting that it will "put Avon back under a cloud of investor anxiety for some time."

Despite the grim outlook, one analyst foresees possibility. Ronnie Moas of Standpoint upgraded Avon to Buy, advising, "The upside is 28% looking out two years and that is probably double what the market will register. You can buy Avon now or wait until after the next good quarter."

UPDATE: It’s been a bad day for multilevel marketers. Not only has Avon dropped 24% to $17.11 at 3:27 p.m., Herbalife (HLF) has fallen 3.4% to $64.91 after CNBC reported that hedge-fund manager William Ackman would release new information on the nutritional-supplement company next month.