STOCK WATCH


Avon: All Around the World

Jeffrey R. Kosnett

The cosmetics company's shares have risen steadily for two years. It's another example of how foreign sales feed the bottom line of otherwise struggling U.S. companies.



Avon Products (symbol AVP) calls itself the company for women, but if it meant only American women, that claim would ring hollow. The U.S. "is a long-term turnaround market," the company says, and it's still a weak link. But U.S. sales are just 28% of Avon's total, a sign that the company's direct-selling formula speaks many languages. Brazil, China, Colombia, Philippines, Russia and Turkey are all places where women now have more money to spend -- and where Avon reports sales growth that is far stronger than the 9% at home.

As a result, the cosmetics company's first-quarter results, released on May 2, both met analysts' expectations and set a favorable tone for the rest of the year and into 2008. Avon earned 34 cents a share, triple the 12 cents of a year ago, and most of that profit came outside the U.S. The dollar's weaker exchange rate, which means profits earned in other currencies become more valuable in dollars, added $3.8 million to earnings, or about a penny per share.

The stock didn't move much and closed May 2 at $41, but it is up 22% so far in 2007. Citigroup analyst Wendy Nicholson raised her target price to $47. Analysts, on average, expect earnings of $1.57 for all of 2007, jumping to $2.06 in 2008, according to Thomson First Call.

Avon is unpredictable because it constantly develops new products, and there's a lot of competition. Heavy advertising expenses and changing customer tastes are facts of life in the beauty business.

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Avon is not going to make or break anyone's portfolio. But there's a larger point here, and it's this: The combination of strong global growth, cost reductions and especially a stake in China are positives for a stock. The runup in the Dow Jones industrial average and other indexes of large-company stocks owes a great deal to investor confidence that American companies, even those that have had problems like Avon, are growing comfortable doing business from one end of the world to the other. This theme should keep the market strong over the rest of the year. (For more on this theme, see Profit From the Global Boom).



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