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Moody’s Puts Avon Ratings Under Review

At least one law firm is contemplating a possible lawsuit on behalf of shareholders seeking class-action status.

The news gets worse for Avon Products Inc.

On Friday, ratings agency Moody’s Investors Service placed the ratings of Avon Products Inc. under review for possible downgrade. And the law firm of Finkelstein Thompson said it wants Avon shareholders to contact them about their legal rights, a typical move when law firms contemplate the filing of a lawsuit on behalf of shareholders seeking class-action status.

Wall Street investors on Friday sent shares of Avon down a further 14 cents, or 0.7 percent, to close at $18.85 in trading on the New York Stock Exchange. Friday’s fall came on the heels of an 18.3 percent dive the previous day.

The move by Moody’s affects $2.25 billion of rated debt, and comes the day after the company posted third-quarter results wherein Avon also said it didn’t expect to achieve the “stated targets” of revenue growth and operating margin improvement in fiscal year 2011. Moody’s said the move was also prompted by Avon’s disclosure of the formal “order of investigation” issued by the Securities and Exchange Commission.

The SEC is reviewing communications with certain financial analysts, as well as probing Avon’s international operations in connection with an inquiry under the Foreign Corrupt Practices Act.

Moody’s said that ratings placed under review include Avon’s A2 senior unsecured long-term and Avon Capital Corp.’s Prime-1 short-term ratings. The outlook for Avon is now “under review” from “negative.”

Jefferies equity analyst Per E. Ostlund said Thursday that Avon’s “3Q results disappointed on multiple levels, with local currency sales growth and operating margin expansion failing to deliver on plan.”

Stifel Nicolaus analyst Mark S. Astrachan on Thursday downgraded shares of Avon to “hold” from “buy” due to the miss of third-quarter earnings per share expectations, the withdrawal of full-year guidance and the SEC proceedings.

“One inquiry is bad, two is a major headache, and we believe the formal order relating to the FCPA investigation indicates a significant step-up in activity, with a resolution unlikely to come anytime soon,” Astrachan said.

The Stifel analyst added that while the operating environment has worsened, “Avon continues to underperform the global beauty and direct selling industries, categories with favorable growth. We believe this is mainly a result of current management‘s inability to execute and anticipate a prolonged period of underperformance as Avon tries to improve operations.”

UBS on Friday downgraded Avon’s stock to “neutral” from “buy” due to execution issues and the two SEC investigations. The price target for Avon shares was lowered to $20 from $31.