Wall Street Is Getting More Upbeat About Coty Inc (COTY) Stock; RBC Capital Reiterates a Buy

It doesn’t take much to send shares of Coty Inc (COTY) higher these days, as last Friday’s response to earnings demonstrates.

Coty saw its stock soar 32% on unremarkable financial results. Specifically, the beauty products maker posted a loss of $960.6 million after reporting a profit a year ago. Overall, Coty earned 24 cents a share on revenue of $2.51 billion. That’s still good news for investors, though, as it beat Wall Street’s expectations of $2.47 billion in revenue and and 22 cents earnings per share.

To the company’s credit, it did experience encouraging performance in its luxury and professional beauty categories, and it’s continuing to make progress toward a recovery in the key consumer beauty area. Furthermore, CEO Pierre Laubies gave a well-received discussion on the company’s earnings call of Coty’s problems and how to fix them. Laubies talked about rapidly addressing supply chain problems, and said he is already seeing signs of progress there. Laubies also discussed the need for discipline, gross margin expansion to fuel consistent reinvestment in marketing and innovation.

RBC Capital analyst Nik Modi commented, “As it relates to margin potential, the number one piece of investor pushback is that Coty’s top-line trajectory would make it highly unlikely the company would be able to improve its profitability. A simple benchmarking of Coty’s existing division margins to its peers would suggest there is ample potential to both improve margins AND reinvest back into top-line—similar to what Estée Lauder was able to accomplish when Fabrizio Freda took over as CEO. We also don’t believe EL/L’Oreal level margins are necessary to recommend the stock. As it stands, EBIT margin for each of Coty’s segments (Luxury, Consumer Beauty, and Professional) lags the peer average by at least 600 bps (and by as much as 930 bps in Consumer Beauty). This underperformance can be explained by meaningful investment to reinvigorate struggling brands as well as a series of both internal and external supply chain issues.”

“Importantly, we’re largely past the supply chain disruption and the company’s consumer insights/R&D efforts seem to be improving – as evident by the positive initial feedback on the CoverGirl relaunch (more premium, higher margin). We point out that if Coty were able to close the gap with the peer average (Luxury 19.6%, Consumer Beauty 16.0%, and Professional 18.1%) by the end of FY’23 that would increase our FY’23 EPS estimate from $0.98 to $1.34 (c.40% lift to EPS power) – this assumes no significant acceleration in top-line,” the analyst added.

Modi reiterates an Outperform rating on Coty stock, with a price target of $13, which implies an upside of 35% from current levels. (To watch Modi’s track record, click here)

Not all analysts on the street voice Modi’s bullish forecast for the global beauty giant, as TipRanks analytics showcase COTY as a Hold. Based on 7 analysts polled by TipRanks in the last 3 months, 2 rate a Buy on Coty stock, while 5 maintain a Hold. The 12-month average price target stands at $9.86, marking a slight upside from current levels. (See COTY’s price targets and analyst ratings on TipRanks)


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