New York City-based Coty is one of the world’s largest beauty companies. It offers a portfolio of products across fragrance, color cosmetics, and skin and body care. The stock has declined 17.7% in price so far this year to close yesterday’s trading session at $8.64. However, it has gained 25.4% over the past year and 11.8% over the past three months. And lately, hedge funds’ interest has increased in the stock.

COTY’s financial net debt improved by approximately $200 million to less than $5 billion at the end of the last reported quarter. In addition, it raised its adjusted per-share earnings guidance for fiscal 2022 to a range of $0.20 – $0.24, up from prior guidance of $0.19 to $0.23.

Also, its CEO, Sue Y. Nabi, said on Nov. 18, 2021, “We expect to outperform the beauty market through FY25 and beyond.” So, we think COTY’s near-term prospects look promising.

Here are the factors that could shape COTY’s performance in the upcoming months:

Positive Developments

On Nov. 18, 2021, COTY announced that it had entered into a licensing agreement with France-based Orveda, which is likely to help expand its Prestige portfolio. COTY’s COVERGIRL launched its first-ever skincare collection with Clean Fresh Skincare on Nov. 15, 2021.

Also last November, COTY announced a definitive agreement to deliver an approximate 4.7% stake in Wella to KKR in exchange for the redemption of approximately 56% of KKR’s remaining convertible preferred shares in COTY. The transaction is expected to simplify its capital structure and generate roughly $14 million in annual dividend savings.

Revenue Growth Across Major Categories

For its fiscal first quarter, ended Sept. 30, 2021, COTY’s net revenues increased 22% year-over-year to $1.37 billion. Its revenue from the Prestige segment increased 35% year-over-year to $870.70 million, while its revenue from the Consumer Beauty segment came in at $501 million, up 4% year-over-year. Its operating income was  $17.20 million, versus a $66 million loss in the year-ago period. Also, its net income increased 86.7% from the same period last year to $228.90 million.

Favorable Analyst Estimates

COTY’s revenue is expected to increase 14.5% in its fiscal 2022 and 6.1% in fiscal 2023. Its EPS is expected to grow by 2,600% this year and 44.4% next year. Also, Wall Street analysts expect the stock to hit $13.14 in the near term, which indicates a potential 52.1% upside.

Reasonable Valuation

In terms of forward non-GAAP PEG, COTY’s 0.34x is 87.9% lower than the 2.81 industry average. And the stock’s 1.36x forward P/S is 3.5% lower than the 1.41x industry average. Also, its 2.01x and 9.58x respective forward P/B and P/CF are lower than the 3.36x and 15.21x industry averages.

POWR Ratings Show Promise

COTY has an overall B rating, which equates to a Buy in our 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 an A grade for Growth, which is consistent with analysts’ expectations that its revenue and EPS will increase.

COTY is ranked #32 out of 64 stocks in the A-rated Fashion & Luxury industry. Also, click here to see the additional POWR Ratings for COTY (Value, Momentum, Stability, Sentiment, and Quality).

Bottom Line

COTY has been making consistent product and services improvements and restructuring its capital structure. It expects its growth to soar over the next few years. Also, its stock is trading at a discount to its peers. So, we think it could be wise to add the stock to one’s portfolio now.

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

While COTY has an overall POWR Rating of B, one could also check out its A-rated (Strong Buy) industry peers: Shoe Carnival, Inc. (SCVL), J.Jill, Inc. (JILL), and Oxford Industries, Inc. (OXM).

COTY shares rose $0.12 (+1.39%) in premarket trading Friday. Year-to-date, COTY has declined -17.71%, versus a -5.94% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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