Stressed Out: Will the Real Avon Please Stand Up?

 | Feb 18, 2016 | 11:23 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Despite fourth-quarter results that could have "finished off" this distressed stock, Avon Products (AVP) had spiked from a five-session low of $2.63 last Thursday to $3.92 a week later. However, in early market trading today, the company is down 4% to $3.76.

So which performance should you trust? Was Avon's rally the new normal, or was it just a hiccup as the stock circles the drain.

We look to the company's recent earnings release and its long-term chart for clues as to where Avon will go next. 

During the company's earnings call, CEO Sheri McCoy and COO James Scully identified South America as an area of focus as it remains one of its most profitable regions. While having a strong foothold in emerging markets is important for Avon, the numbers suggest that the company is struggling in the region.

Fourth-quarter sales in South America were down 26% to $779.2 million -- though the company did point out that on a constant currency basis, revenue remained unchanged. The company's Brazil sector saw the steepest decline, falling 44% (14% on a constant currency basis) while sales in Mexico dropped 13% (up 6% in constant currency).

Sales in the Europe, the Middle East and Africa fell 13% year over year to $669.5 million, and revenue from Asia declined 16% to $158.6 million.

Despite the currency-muddled financial picture from the fourth quarter and full year -- full-year sales were down 19% as the company lost $1.1 billion -- McCoy was upbeat during the earnings call last week. "Our operating performance for the fourth quarter and fiscal year was in-line with our most recent outlook. Looking back at 2015, our key local markets drove steady improvement in overall performance. Importantly, we improved year-on-year Active Representative trends – with full-year growth of 1%."

However, the most promising factor in the company's near-term future remains its strategic partnership with investor private equity management firm Cerberus. In December, Avon announced that Cerberus was investing $435 million into the company, purchasing 80% of Avon's North American segment for another $170 million and spinning it off into a separate entity.

This partnership could be a key factor in the stock's post-earnings rally. 

"Markets are forward looking -- focused maybe six to nine months out. How else can you explain the market bottom in March 2009? The economic news on the U.S. economy did not improve until the summer. The same goes for the top back in 2007. The market turned down but the news was still positive," Real Money chartist Bruce Kamich said in an email exchange. "The problems that took the markets to the edge did not surface until 2008. The same might be said for Avon Products -- prices are improving despite an earnings letdown."

"This chart of AVP shows that prices have been moving sideways since September. Dips to and below $3 have been bought and the On-Balance-Volume (OBV) line has been moving up from a November low telling us that buyers had become more aggressive and bought more shares of AVP on days when it closed higher. Momentum is also positive with lower prices in November and January but equal lows from the momentum study. AVP could close above the flat 50-day moving average. AVP stalled at the $4 level in October and December. It could happen again or we could see an upside breakout," Kamich concluded.

Only time will tell whether this stressed out stock will reward the investors who have stuck with Avon through this volatile stage. 

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Avon Is Calling -- Should You Answer?

Stressed Out: Office Depot, Staples Aren't Taking FTC Opposition Laying Down

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