Avon’s Rating Downgraded

Zacks investment research cut its long-term recommendation on Avon Products Inc. to ‘Underperform’ from ‘Neutral’ with a target price of $25.00 per share. Also, the company has a Zacks #5 Rank, implying a short-term ‘Strong Sell’ rating on the stock.

According to Zacks, Avon recorded feeble operating performance in the fourth quarter of 2010. The company’s earnings per share plunged 13.2% to $0.59 from $0.68 per share in the year-ago period. The decline was principally due to reduction in operating margin, which resulted from unfavourable product mix, rising commodity cost and a 27% sales decline in Venezuela.

Moreover, Avon ended fiscal 2010 with a long-term debt of $2,408.6 million, reflecting a debt-to-capitalization ratio of 59%, which is substantially higher, and could negatively influence the company’s credit worthiness and make it more vulnerable to the macro-economic factors and competitive pressures.

Additionally, the North American market continues to remain sluggish with volume falling 14.0% in the fourth quarter of 2010. Moreover, the company’s initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities. This is likely to undermine Avon’s overall operating performance, moving forward, according to Zacks.