News Analysis date published New: 
Friday, February 22, 2013 - 06:00
New Date created: 
Friday, February 22, 2013 - 06:00
New Date last updated: 
Friday, February 22, 2013 - 06:00

This Turnaround Stock Could Rally 20% in 3 Months

Friday, February 22, 2013 6:00 AM

There's a lot of money in looking good. Just ask the proprietors of beauty supply giant Avon Products (NYSE: AVP). Last week, the world's largest direct seller surprised Wall Street with a much stronger-than-anticipated fourth-quarter earnings report.

The company did take a $209 million write-down on its ailing Silpada jewelry business, and that resulted in a decline in net profit during the quarter. The good news, however, is that Avon was able to reverse long-time declines in top sales markets such as Brazil and Russia. The company also increased the number of sales representatives it employs by 1%.

After write-downs and adjustments, Avon posted an operating profit of 37 cents per share, 37% above the consensus forecast for an operating profit of just 27 cents. The upbeat news sent Avon Products shares knocking on a bullish door, as the stock spiked more than 20% in Feb. 12 trade.

The positive strides Avon made during the fourth quarter are widely seen as evidence that the company now is in good hands with current CEO Sheri McCoy. Last April, McCoy took the reins of the cosmetic seller and put her own turnaround plan in place. That plan included what has now become somewhat of a novelty on Wall Street -- an honest plan that takes into account the depth of the company's problems, and includes the admission that things haven't been all that pretty in recent years. It also includes the admission that too much money was wasted trying to do too many fancy things to up the company's profile.

McCoy's realistic, refreshing and parsimonious approach to the situation sits in stark contrast to that of former CEO Andrea Jung, who tried multiple times to spend the company into prosperity. The result was hundreds of millions in lost capital, and even a U.S. regulator's probe into overseas bribery charges.

During the conference call accompanying Avon's fourth-quarter earnings release, McCoy said, "We have a lot of work ahead of us but I am confident that we will continue to make progress towards the financial goals that we laid out for you."

McCoy went on to call the quarterly numbers, "early signs of stabilization." One of McCoy's stated goals is for the company to achieve mid-single-digit percentage revenue growth by 2016. That would be a very big turnaround indeed, considering that revenue fell 5% in 2012.

I do think that the company has a great chance of doing just that, as it is well-positioned in many of the world's biggest growth markets. With approximately 6 million independent sales people around the world, many in regions and countries where the growth potential and newfound middle-class buyers are just now beginning to afford to spend to look better and buy luxuries like cosmetics, the company is poised for growth on a massive scale.

I like Avon Products here, not just as a momentum trade (which it certainly is), but also as one of those management stories that's capable of keeping the shares surging higher for years to come.

Action to Take --> Buy AVP at the market price. Set stop-loss at $18.80, approximately 8% below the current price. Set initial price target at $24.52 for a potential 20% gain in three months.

This article originally appeared on ProfitableTrading.com:
This Turnaround Stock Could Rally 20% in 3 Months

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Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.