Coty Inc. (COTY - Get Rating) in New York City is one of the world’s largest beauty corporations, with a well-known portfolio of fragrance, color cosmetics, and skin and body care products. The company is a global fragrance leader and ranks third in color cosmetics. Its shares have gained 12.6% in price over the past six months and 5.86% over the past month to close yesterday’s trading session at $8.69. Its strong top-line growth and development across all its business segments, spurred by key product launches, have propelled its share price.

Last month, COTY reported that it now expects to receive a shareholder payout of at least $250 million from its equity holding in Wella, representing a considerable increase from the previous estimate of around $175 million. Coty aims to use this distribution, together with cash, to fully redeem its EUR550 million unsecured notes due 2023 when the bond call price falls to par on April 15, 2022, accelerating the company’s deleveraging trajectory.

However, the stock has declined 17.2% in price year-to-date. Though the company is embracing digital alternatives, ranging from advertising to e-commerce platforms, to stay abreast of changing customer preferences and promote development, its shares could decline further due to its expensive valuation.

Here is what could shape COTY’s performance in the near term:

Mixed Profitability

COTY’s 63% trailing-12-months gross profit margin is 84.6% higher than the 34.1% industry average. However, its 5.9% trailing-12-months EBIT margin is 38.3% lower than the 9.7% industry average. Also, its trailing-12-months ROA and ROC are 52% and 72.5% lower than their respective industry averages.

Stretched Valuation

In terms of forward Non-GAAP P/E, the stock is currently trading at 33.04x, which is 78.7% higher than the 18.4% industry average. Also, its 2.33x forward EV/Sales is 28.5% higher than the 1.82x industry average. Furthermore, COTY’s 20.26x forward EV/EBIT is 20.2% higher than the 16.85x industry average.

POWR Ratings Reflect Uncertainty

COTY has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COTY has a D grade for Stability, which is justified given the stock’s 2.47 beta.

Among the 66 stocks in the A-rated Fashion & Luxury industry COTY is ranked #37.

Beyond what I have stated above, you can view COTY ratings for Momentum, Quality, Value, Growth, and Sentiment here.

Bottom Line

COTY is a leading cosmetics company with an excellent product line and a worldwide market presence. However, the company’s operational inefficiencies and premium valuation could concern investors. In addition, the stock is currently trading below its 50-day and 200-day moving averages of $8.8 and $8.95, respectively, indicating a downtrend. Therefore, we believe investors should wait before scooping up its shares.

How Does Coty Inc. (COTY) Stack Up Against its Peers?

While COTY has an overall C rating, one might want to consider its industry peers, J.Jill Inc. (JILL - Get Rating), Hugo Boss AG (BOSSY - Get Rating), and Movado Group Inc. (MOV - Get Rating), which have an overall A (Strong Buy) rating.

COTY shares were unchanged in premarket trading Tuesday. Year-to-date, COTY has declined -17.24%, versus a -7.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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