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Investing: Avon is having a rough time

What's next for Avon? Also: T. Rowe Price's Health Sciences fund could grow fast but carries risk.

May 01, 2011|By Andrew Leckey

Question: I am disappointed with my shares of Avon Products Inc. What do you think is next for the company?

Answer: Investors expect the stock of a brand-name company to be sturdy and reliable through all market conditions, come rain or shine. But the prospects of the world's largest direct marketer of cosmetics, fragrances and skin care have been cloudy, with some storm activity.

Avon markets to women in more than 100 countries through about 6.5 million independent sales representatives. Because most of its sales are outside the U.S., the company has significant growth potential.

Its biggest problem has been a speedy move into emerging markets. The effort lacked coordination and led to a costly restructuring program that is due to be fully implemented by 2013.

The company sold its ownership stake in Avon Japan last year and has acknowledged weakness in its Brazilian and Russian operations. An investigation since 2008 has been looking into whether Avon employees in China violated U.S. anti-bribery law.

With its well-known brand, reasonable stock price and potential for improved profitability, Avon could be an attractive acquisition candidate, especially for rival looking to get into direct selling. Takeover speculation has boosted the stock in the past.

Recently, however, Avon shares have not shined. They are up 1.1% this year after slumping 7.8% in 2010.

The company earned $606 million last year, down 3.1% from 2009. Its 2010 revenue was up 6.4% to $10.9 billion.

When Avon released its 2010 earnings in February, Chief Executive Andrea Jung said the company was "aggressively addressing execution challenges."

Also in February, Avon increased its quarterly dividend by 4.5%.

Complementing Avon's famous brand, Jung brings her own star power: In 2010 she received the Clinton Global Citizen Award for leadership in the corporate sector and ranked No. 2 on a Financial Times ranking of "top women in world business."

Analyst ratings on Avon consist of five "strong buy" grades, two "buys," eight "holds" and two "underperforms," according to Thomson Reuters.

• Health Sciences fund could grow fast but carries risk

Question: Would the T. Rowe Price Health Sciences fund make sense for a long-term investment?

Answer: Demand for healthcare could grow rapidly for some time because of fast-aging populations, but the sector carries risk because of regulatory changes in the U.S. and economic uncertainty in Europe, where many drug companies are headquartered.

And this $2.8-billion portfolio's large number of small- and mid-capitalization stocks increases its volatility.

The fund, however, is up 26% in the last 12 months, with a three-year annualized return of 12%. Both results ranked near the top of healthcare funds.

The fund does not impose a load, or sales charge, on purchases of its shares, but it does require a minimum initial investment of $2,500. The fund's management expenses are low, last reported at 0.84% of fund assets.

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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