Dear Mr. Berko:
I’ve been using Avon’s soaps, skin care lotions and fragrances almost forever, and my neighbors and I believe that the company’s products are just as good or better than those of Revlon, L’Oreal and others. So I bought 200 shares in late 2004 at $46, but it’s never been that high since. I want to buy 200 more shares at the current price ($9.04), which would bring my cost basis down to about $28, but my broker thinks this is a bad idea. She likes Avon’s products as much as I do, but for several years, she has been recommending that I sell my shares and take a tax loss. I don’t agree with her. I feel Avon is undervalued, and so does my husband. And my Avon representative recently purchased 450 shares. Please give me your guidance.
— SD, Cincinnati
Dear SD:
Recently, Stifel Financial, a classy brokerage headquartered in St. Louis that brags its headquarters are far from the gaseous exosphere of Wall Street, downgraded its recommendation on Avon Products (AVP-$9.04) from “buy” to “hold.” Simultaneously, UBS — a huge brokerage home-ported in Zurich, where analysts wear lederhosen and boast their culture is pure Wall Street — upgraded AVP from “sell” to “hold.” It’s interesting that two brokerages, worlds apart in distance and culture, issued the identical conclusion: to hold the stock. That’s serendipity!
Lots of folks share your opinion that most of AVP’s fragrances, cosmetics and skin care, personal care and outerwear products are as good as or better than the products of Coty, Mary Kay, Revlon and L’Oreal. So if AVP were to quadruple its prices on all its products, I believe that most of those consumers would passionately tell you that Avon’s products are far superior.
But I agree with your broker, who sounds like a smart lady. You sound as if you’ve fallen in love with this stock. The toiletries and cosmetics sector has been in the doldrums for several years, and its timeliness ranks just below “lousy” and “stinks.” In fact, during the past few years, this group has slipped in ranking from the top 10 percent to the bottom 10 percent, and your broker’s “sell” recommendations have been right on the mark.
AVP is one of the world’s largest marketers of personal care and beauty products, jewelry, shoes, and paraphernalia for kids. Last year, over 6 million active Avon Ladies (and a few Avon Men) in more than 100 countries sold $10 billion worth of stuff in North America, South America, Europe, Asia, Africa and the Middle East, but Avon only earned pennies a share. In 2015, AVP should retail about $9.2 billion of ephemera and might earn a dollar a share. AVP’s profits next year will derive from operating cost reductions rather than a sales turnaround. This company is top-heavy with redundant staff, so management will begin by eliminating about 10 percent of the staff in its North American headquarters. Then it must lower its manufacturing cost, seek better prices for raw materials, design ethnic sales kits and product for Latin America, recruit aggressive sales staff in Russia, and design compelling incentive programs to attract more motivated sales reps.
AVP trades at a 25-year low, and most analysts believe that the shares have limited appeal for the near term. Though you’re an AVP aficionado, I suggest you follow you broker’s advice — but with a twist. Consider buying 200 AVP shares at the current market price, which would give you a position of 400 shares. Then, 31 days after this purchase, sell the 200 shares you bought at $46 and take a $7,200 capital loss. So you’d still own 200 shares, though with a lower basis of $10 a share.
However, Invesco, T. Rowe Price, Vanguard, BlackRock and a few others own hundreds of millions of shares. And one of the geniuses I sometimes talk to at BlackRock thinks AVP could be a $35 stock in three to four years. The 24-cent dividend yields 2.4 percent now, and he thinks earnings will turn around strongly by 2017, which might allow the dividend to be doubled.
––––––––––
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
© 2014 Creators.com
