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Shareholders of Coty would probably like to forget the past six months even happened. The stock has dropped 42.5% and now trades at a new 52-week low of $5.40. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
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Despite the more favorable entry price, we're swiping left on Coty for now. Here are three reasons why COTY doesn't excite us and a stock we'd rather own.
Why Is Coty Not Exciting?
With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse spanning cosmetics, fragrances, and skincare.
1. Core Business Falling Behind as Demand Declines
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
Coty’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 1% year on year.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Coty’s revenue to stall, a deceleration versus its 6.5% annualized growth for the past three years. This projection is underwhelming and suggests its products will face some demand challenges.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Coty historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
Coty’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 9.5× forward price-to-earnings (or $5.40 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.