Analyst Note| Rebecca Scheuneman, CFA |
After digesting no-moat Coty’s fiscal third quarter, we don’t expect a material change to our $5.50 fair value estimate, which assumes long-term annual sales growth of just over 3% and operating margins exceeding 14% by 2030 (compared with a 2.4% average annual organic sales decline and 7% margins the three years prior to the pandemic). Even with the stock’s 13% drop on the report to $9 (given overzealous expectations, in our view), the shares trade well above our valuation, and we suggest investors await a better risk/reward. While we are not keen on valuation, we do have a favorable view of Coty’s six strategic priorities, which drive our forecast for materially improved sales trends and profit margins. Coty is seeking to: 1) stabilize its mass beauty business; 2) accelerate its prestige division by expanding from its core fragrance portfolio into makeup; 3) build a skincare portfolio across mass and prestige; 4) enhance its digital capabilities; 5) further penetrate China; and 6) become an industry leader in sustainability. Coty made progress on many of these initiatives during its quarter, most notably on the first item on the list. CoverGirl realized its first month of market share gains in four years, on the strength of its renewed focus on clean beauty products. While Coty’s overall mass beauty business is still losing market share, the gap has narrowed materially and upcoming revitalization efforts for the Max Factor and Rimmel brands should further close the gap.