TheChek News Flow

You don’t have to go door to door to find dismal news about Avon (AVP) today. Between the stock tanking over 20% and the company’s announcements of a weak third-quarter topped with news that federal regulators are increasing the penalties to resolve its ongoing bribery probe, it’s one ugly afternoon for the beauty product and cosmetics company.

The Wall Street Journal’s Serena Ng and Anna Prior recapped Avon’s woes nicely this afternoon:

The government’s position, disclosed by Avon in a regulatory filing, adds another big weight on a company already struggling to turn around a string of poor results. On Thursday, the door-to-door seller of makeup and consumer products reported a third-quarter loss following a steep drop in sales in the U.S. and China.

Regarding the bribery probe, the WSJ writes:

Avon has been trying to resolve a federal bribery probe that has dogged it since 2008 and has already racked up roughly $340 million in legal and related costs. The company is in talks with the Securities and Exchange Commission and Justice Department to settle an investigation into whether Avon breached the Foreign Corrupt Practices Act by providing gifts or making payments to officials in China and other countries to get licenses to sell its products.

Analysts were mixed-to-negative in reaction to the news, revising their recommendations and slashing price targets. Rommel Dionisio of Wedbush, for one, cut the price target to $21 from $24, writing:

Avon reported third-quarter revenue of $2.323 billion and adjusted earnings-per-share of 14 cents, again short of consensus forecasts of $2.443 billion and 19 cents, respectively. Overall local currency sales fell 1%, sequentially worse than the 2% growth seen in the second quarter, as sharp declines in North America (18%) and Asia-Pacific (19%) were partially offset by growth in Latin America (6%).

We believe shares of Avon should trade at a 5%-10% discount to the peer group average. Such a discount implies a 2014 estimated price-to-earnings multiple of 17 times.

Wendy Nicholson of Citigroup considers the news to be a “step back,” noting that it will “put Avon back under a cloud of investor anxiety for some time.”

Despite the grim outlook, one analyst foresees possibility. Ronnie Moas of Standpoint upgraded Avon to Buy, advising, “The upside is 28% looking out two years and that is probably double what the market will register. You can buy Avon now or wait until after the next good quarter.”

UPDATE: It’s been a bad day for multilevel marketers. Not only has Avon dropped 24% to $17.11 at 3:27 p.m., Herbalife (HLF) has fallen 3.4% to $64.91 after CNBC reported that hedge-fund manager William Ackman would release new information on the nutritional-supplement company next month.

Valeant Pharmaceuticals: Stock Could Climb 42%

Valeant is taking over profitable market niches that its mega-cap competitors ignore.

Hefty research and development expenses, patent cliffs, and slow growth levels are well-known knocks against big pharmaceutical companies. They're all problems that Valeant Pharmaceuticals International (ticker: VRX) doesn't have. Over the past five years CEO Michael Pearson has transformed the specialty pharmaceutical company with a series of savvy acquisitions, diversifying its product mix to lower patent and approval risk, and expanding in fast-growing emerging markets. Yet investors can still buy the stock for about 12 times forward earnings—on par or cheaper than other big drug makers. "We first bought Valeant in early June and we're still buying it," says John Maloney, chief executive of M&R Capital Management. "They have a very broad product portfolio with steady organic growth and limited risk: Their biggest product is only 3% of revenue, so patent cliffs aren't a problem, and 75% of their revenues don't involve government reimbursement, [which can] change over time."

Maloney sees the company earning around $11.50 in 2016, even without any future acquisitions. "Just using the forward earnings multiple now, that would get you a $150 stock in two years." Shares closed Thursday at $105.72.

Goldman Sachs is also impressed. Analyst Gary Nachman recently added the company to his Conviction Buy List with a 12-month price target of $130, or 13.7 times his 2014 adjusted earnings-per-share estimate of $9.47. "Even without future M&A, we expect that Valeant will continue to be a 'beat and raise' story, and that could be largely driven by synergies from recent deals coming in ahead of expectations."

The stock shed 2.5% Thursday in response to third-quarter earnings—Valeant reported a loss of $973.2 million, reflecting restructuring and legal charges. Yet the dip looks like a buying opportunity, as the major charges were one-time in nature, and the company's EPS otherwise exceeded expectations. Costs surrounding its $8.7 billion acquisition of eye-care firm Bausch + Lomb are nonrecurring, and Valeant increased its synergies estimate for the deal. In addition, its $142.5 million litigation settlement with Anacor Pharmaceuticals (ANAC) was smaller than that company had expected, and does not include ongoing royalty payments or an injunction to stall Valeant's product launches.

Valeant closed the Bausch + Lomb deal in August, and estimates $850 million in cost reductions. While that deal was bigger than most, it typifies Pearson's strategy of making accretive acquisitions and targeting products with healthy margins in areas that have been neglected by bigger pharmaceutical companies, from dermatology to ophthalmology and branded generics. This rollup strategy has allowed it to boost its earnings power and diversify its revenue stream.

BMO Capital Markets analyst Alex Arfaei says that a recent decision by Merck (MRK) to refocus on its top 10 geographic markets is a positive for Valeant. "The businesses that Merck is going to divest are in Valeant's markets," he says. "Not only will [Valeant] have less competition, but at least some products could be available for purchase."

Arfaei isn't concerned about the debt that Valeant has accrued during its purchases. Valeant has just under $11 billion in debt now, against a little more than $2.5 billion in cash. He says the company generates an impressive amount of cash that allows it to bring down leverage quickly and that its cost structure—lower taxes and R&D expenses—means that "every dollar of revenue is more profitable for Valeant than Merck," so it can afford to make bids for upcoming opportunities.

Valeant's U.S. prescription dermatology business is one of its best acquisition success stories—it moved from being the 11th largest player in 2008 to the market leader, with sales 50% higher than its closest competitor. Its branded generics business, in which it creates brand names for generic drugs that can still sell at reduced price points, is growing rapidly in Latin America and Eastern Europe.

Insiders appear confident about the company's prospects: Pearson owns nearly 2% of the shares outstanding, and during a five-week period beginning in mid-August, five insiders purchased more than $6.7 million in stock. The purchases came even as the stock was at multiyear highs and the health-care sector in general was slightly skewed toward executive selling, according to InsiderScore, which classified the moves as "an unusually aggressive buying streak."

To be sure, it's not a foolproof stock. Like any drug company, Valeant could suffer if drugs in its pipeline aren't approved by the Food and Drug Administration, and its bevy of end markets means that foreign exchange can take a bite out of the bottom line. Many investors may be put off by the debt load.

Still, Valeant is aiming to bring down its debt meaningfully in the next few years, helped by its strong cash position. The company is so well diversified that bad news for one of its products doesn't spell disaster.

"We think there's a lot of upside left," says M&R Capital's Maloney.

When Prem Watsa, chief executive of Fairfax Financial, made a tentative $4.7bn cash offer to take BlackBerry private, he set in motion a countdown that runs out on Monday. That is the deadline BlackBerry, the struggling Canadian smartphone maker, set for Mr Watsa to complete his due diligence and make a definitive offer, and for other potential bidders – including BlackBerry’s founders Mike Lazaridis and Douglas Fregin – to “step up, or shut up”.

The two men, who are said to be concerned that BlackBerry might be broken up, disclosed their interest in a recent filing with the US Securities and Exchange Commission and hired Goldman Sachs and Centerview to review their options. Together they hold an 8 per cent stake in BlackBerry and are said to have funding offers from several separate sources. People close to the two men say that they are yet to decide whether to make a formal offer for BlackBerry, or perhaps team up with Prem Watsa on a joint bid. Mr Lazaridis, the technical wizard behind the original BlackBerry handsets, was co-chief executive of the company until the end of February last year when he and Jim Balsillie stepped aside to make way for Thorsten Heins, BlackBerry’s current chief executive. People close to the discussions note that even if the Fairfax offer turns into a definitive agreement, the new owners would still need someone to run the company – a job Mr Lazaridis might be willing to resume in order “to save his baby.” In the meantime, BlackBerry’s share price has remained below the $9-a-share price tentatively offered by Fairfax. This reflects investors’ doubts about whether the Fairfax deal will be consummated, and whether any other bidders will emerge. As part of the tentative agreement between BlackBerry and the Fairfax-led consortium, Fairfax was given six weeks to conduct due diligence, while Fairfax agreed to a “go shop” clause under which BlackBerry has been permitted to “actively solicit, receive, evaluate and potentially enter into negotiations with parties that offer alternative proposals”.

But the break clause in the tentative deal was lopsided. Whereas BlackBerry agreed to pay a break-up fee of at least $160m if a better offer materialised, Fairfax could walk away for free. Some analysts including Pierre Ferragu of Bernstein Research have expressed doubts about the likelihood of the Fairfax deal closing because Mr Watsa has yet to provide any details of the other members of his consortium, or his funding sources. Mr Ferragu told his clients last month that the proposed Fairfax deal was “unlikely to close” while noting that “of the total $4.7bn required in the transaction, Fairfax is not committing any more than it already had when it increased its equity stake last January to about $480m total.” Mr Watsa however says that he remains committed to the deal. In an interview with the Associated Press in late September, he emphasised that Fairfax was not in the business of making an offer and then walking away or redoing the deal. “We’ve got a record of 28 years of completing what we’ve done. We’ve never renegotiated,” Mr Watsa said. “We thought long and hard before we offered $9 a share and we’re not in the business of offering a number and at the last minute changing the figure. Over 28 years our reputation is stellar on that front. We just don’t do that.” Mr Watsa has since declined to comment further. Nevertheless, since the Fairfax bid was announced there has been a steady stream of speculation about other potential bidders. The companies that have been mentioned include IBM, Microsoft, Samsung, Lenovo, Google, Cisco, SAP, Amazon and most recently Facebook. Most have declined to comment on the “rumours and speculation” although SAP’s finance chief appeared to rule out his company in comments he made 10 days ago. Microsoft, which is acquiring Nokia; Samsung; Lenovo; and Google through its Motorola unit all have existing smartphone operations and could benefit directly from BlackBerry’s existing technology. Samsung and Lenovo, in particular, could use the new BlackBerry 10 operating system to cut their dependence on the Android operating system supplied by their partner and rival, Google. However, a bid by either company would have to be approved by Canada’s government and security agencies, which might object in particular to Lenovo, which is headquartered in China. IBM and Cisco have both been mentioned as possible bidders because of their interest in BlackBerry’s secure services for business customers, including its new mobile management software that enables corporate IT chiefs to manage not only company BlackBerrys but other manufacturers’ handsets that employees bring to work. In spite of the rumours, most analysts doubt whether any “trade” or purely financial buyer such as a hedge fund would be interested in acquiring the whole of BlackBerry, particularly while it is in the midst of such a radical restructuring. They do however believe that some of the big tech companies mentioned could be interested either in parts of BlackBerry – for example its secure private data network and BBM messenger service – or in its extensive patent portfolio, which some analysts suggest could be worth between $1bn and $3bn. Some potential bidders including Cerberus Capital Management, a private equity group that specialises in acquiring distressed assets, have signed non-disclosure agreements with BlackBerry in order to obtain access to the company’s accounts. But so far none have confirmed their interest. John Sculley, Apple’s ex-chief executive, has also been mentioned as a potential bidder along with unnamed Canadian investors, although few insiders give much credence to that suggestion given Mr Sculley’s chequered history. Mr Sculley ran Apple for a decade before Steve Jobs returned to the company in 1993 and pushed him out. Mr Sculley himself has declined to comment on reports of his interest. One way or another, it should become clear next week whether BlackBerry has a future as an independent handset maker battling for a slice of a global smartphone market that IDC, the market research firm, estimates will grow 40 per cent to more than 1bn units this year, or be broken up and sold. BlackBerry still has about $2.6bn in cash reserves, but with the company burning through an estimated $500m in cash per quarter, the clock is ticking

Israel’s air force attacked two military sites inside Syria on Wednesday evening, US military sources confirmed, marking the latest of several such covert strikes on the country’s northeastern neighbour this year. The sites are near the port city of Latakia and the capital Damascus, according to a person briefed on the matter, who said the US military believed that it was Israel that attacked. Confirmation of the attack late on Thursday followed earlier reports of sightings of Israeli jets in Lebanon and at least one explosion in Syria.

Israel’s military, which has struck targets in Syria several times this year, declined to confirm or deny that it carried out the strikes. “We never comment on foreign reports,” an Israel Defence Forces spokeswoman said. Nagham Ghadri, a member of the Syrian National Coalition, the Turkey-based opposition group, said that activists in Latakia had reported hearing a huge explosion coming from the area of Jibla, which hosts a military airport, on Wednesday. “It came suddenly, activists didn’t hear anything before it,” she said. The coastal province of Latakia is a military and political stronghold for President Bashar al-Assad’s regime. There were reports that Israel previously struck an arms depot that served Syrian and Russian interests in the area in July. CNN, the US news network, on Thursday cited an unnamed official in Barack Obama’s administration who said that Israel attacked because it believed that there was “sensitive and sophisticated missile equipment” that might have been transferred to the military group Hizbollah, an ally of the Assad government. Earlier on Thursday in neighbouring Lebanon, the state news agency said that three Israeli reconnaissance aircraft had flown over its territory on Wednesday, although such violations occur frequently. During previous Israeli airstrikes on Syria, the aircraft are believed to have gone through Lebanon. Benjamin Netanyahu’s government has repeatedly said that it would not allow game-changing weapons to fall into the hands of any of the warring parties in Syria or Hizbollah. In May, the IDF struck military sites near Damascus and in southern Syria, reportedly targeting Iranian-built Fateh-110 long-range missiles that were in transit through Syria to Hizbollah in southern Lebanon. In January, Israel struck a convoy of Russian SA-17 anti-aircraft missiles, western and regional sources said. Confirmation of the IDF’s strikes this year, including the one carried out on Wednesday, have all come from outside the country. Israel’s silence on its incursions into Syria have allowed it to act without publicly embarrassing Mr Assad’s government or compromising its own official stance of neutrality in the neighbouring civil war. The two countries share a border in the Israeli-occupied Golan Heights, where fighting has come close to the ceasefire line several times this year, and mortars and bullets have landed inside Israel, prompting the IDF to return fire.

Meggitt Plc Sees trading below views, now sees Q3 sales growth in the low single digits. - Underlying trading during the period covered by this statement has been slightly below expectations, principally due to short term production difficulties at Meggitt Sensing Systems and the timing of contract wins and project milestones in one of our energy businesses.Civil aftermarket revenues continued their gradual recovery, up 2% year on year in the third quarter. Encouragingly, military revenues remained flat despite sequestration. - The military outlook remains less certain due to the lack of visibility on sequestration in the USA. Prospects for the energy market remain very encouraging. - Now expects a 2013 revenue growth rate in the low single digits. - The Group continues to expect percentage constant currency revenue growth in the mid-single digits in 2014.

- Raw materials supply issue: the Group has recently identified a raw material supply issue relating to one product type dating back to 2012. A solution is in place, including where necessary the replacement of the relevant parts over the next few years. The cost of this issue is uncertain but we are providing £20m to account for the expected total financial exposure over the coming years. - Source TradeTheNews.com

Oct YTD European Sector Perf in Oct Dow Jones +2.33% +18.63% Insurance +6.66% S&P 500 +3.63% +23.16% Telecom +5.42% Nasdaq +2.66% +29.81% Media +4.64% Russel 2k +1.17% +29.53% Oil&Gas +4.61% Brazil +2.10% -10.99% BAnk +3.77% Basic Res +3.72% EuroStoxx +4.60% +16.39% Fin. Serv.+3.37% FTSE 100 +4.20% +14.13% AutoPart +3.19% CAC40 +2.46% +18.09% Food &Bev +3.07% IBEX35 +6.06% +21.31% Real Est. +2.91% FTSE MIB +7.65% +18.92% Const&Mat +2.82% AEX +3.78% +14.36% Pers&Hsld +2.39% OMX +1.20% +16.18% Healthcar +2.36% Swiss +2.17% +20.69% Util +2.34% Retail +2.14% Nikkei -1.95% +36.62% Chemical +1.95% Hang Seng +1.83% +2.78% Travel&Ls +1.87% Shanghai -1.10% -5.20% Ind. Good +0.94% Tech -0.82%

Up

*ALCATEL-LUCENT RAISED TO HOLD VS SELL AT SOCGEN *HENDERSON RAISED TO HOLD VS SELL AT SOCGEN *LUNDIN PETROLEUM RAISED TO BUY VS HOLD AT SOCGEN *MOTHERCARE RAISED TO NEUTRAL VS SELL AT UBS

Down

*AIR FRANCE CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE *COLOPLAST CUT TO NEUTRAL VS BUY AT BOFAML *GO-AHEAD CUT TO SELL VS NEUTRAL AT UBS *INDRA SISTEMAS CUT TO SELL VS HOLD AT SOCGEN *SHELL CUT TO HOLD VS BUY AT SOCGEN *WACKER CHEMIE CUT TO SELL VS NEUTRAL AT CITI *WEIGHT WATCHERS CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS

PT Change

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Initiation

*CAPITA RATED NEW SELL AT LIBERUM, PT 880P *TENARIS RATED NEW NEUTRAL AT MACQUARIE, PT EU17.4 *VALLOUREC RATED NEW OUTPERFORM AT MACQUARIE, PT EU49 *VESTAS WIND SYSTEMS RATED NEW BUY AT SOCGEN, PT DK175

Country Sector Stock Call

*EUROPEAN BASIC RESOURCES RAISED TO OVERWEIGHT AT CITI *INDUSTRIALS/REAL ESTATE/RETAIL RAISED TO NEUTRAL AT CITI *BofAML Now Sees ECB 25bps Refi-Rate Cut Next Week

*AB INBEV REMOVED FROM CONVICTION SELL AT GOLDMAN, STILL SELL *E.ON NAMED A LEAST PREFERRED STOCK AT CITI, REPLACES RWE *Overweight BNP, Dividend Hike Increasingly Likely: M. Stanley *Veolia Environnement Named a Most Preferred Stock at Citi *WH SMITH CUT FROM UBS’S LEAST PREFERRED LIST

US Markets finish the month on -ve note, S&P is still 4.5% on the month, volumes were quite low before a sell program hit the market on the last 30mnst pushing volumes to 900mil shares...VIX +0,7% @ 13,75...Twin Manufacturing PMIs from China - official and final HSBC - both top estimates to hit multimonth highs. HSBC chief economist points to stronger momentum of manufacturing growth translating into the first expansion of employment since March. Moreover, Oct marked the strongest expansion of new business from abroad in nearly a year, and the stocks of finished goods increased for the first time in four months. ...Shanghai +0.38%...Sony slump, Nissan cuts FY forecasts...Nikkei is down -0.9% but still up 0.8% on the week...

Eur$ 1.3552 S&P Fut +0.11% European fut indicated 10bps higher

Keep an eye on : - BMPS IM : Monte Paschi Foundation Says Sale of Stake in Bank Is Possible - BNP FP : Overweight BNP, Dividend Hike Increasingly Likely: M. Stanley - BRNL NA : Brunel 3Q Revenue Rises on Boost in Energy, Reiterates Outlook - CAV1V FH : Caverion 3Q Profit Beats, Sales Miss Ests.; 2H Forecast Is Kept - CSGN VX : Credit Suisse Fires Trader on ‘Unusual Trading’ Losses ($6m loss) - DETNOR NO : Det Norkse 3Q Oper. Loss NOK518m; Total Production 5,940boe/d - FIS1V FH : Fiskars 3Q Sales Rise, Profit Declines; 2013 Outlook Unchanged - GSF NO : Grieg Seafood 3Q Ebit Before Fair Value Adjustment NOK76.5m - PRA GY : Praktiker Management Said to Bid for Company - PUB FP : Omnicom, Publicis Report Expiration of HSR Act Waiting Period - RNO FP : Nissan Cuts Full-Year Profit Forecast, Overhauls Management - SDA1V FH : Sponda 3Q Earnings Miss Ests.; Now Sees 2013 Vacancy Rate Rising - SNE US : Sony May Need More ‘Aggressive’ Reform, Fitch Says, stock -12% in jap. - SNG GY : Singulus 9M Sales Rise 11%; Sees 2013 IFRS Net Loss - TEL NO : Telenor Hires JPMorgan to Advise on Conax Sale, Reuters Reports - UBSN VX : UBS Examines Transfer of Swiss Business to Subsidiary, NZZ Says - VOD LN : AT&T said to prepare Vodafone bid as soon as next year - VIE FP : Veolia Environnement Named a Most Preferred Stock at Citi

*S&P Affirms Jordan BB-/B Ratings; Outlook Still Negative *Lebanon Rating Cut at S&P on Impact of Syrian Civil War *UKRAINE CUT TO B- FROM B, OUTLOOK REMAINS NEGATIVE, S&P SAYS

*NISSAN CUTS FULL-YEAR NET INCOME FORECAST 15% TO 355 BLN YEN

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