Will COTY Recover?
Dear Mr. Berko: I’ve never seen you talk about Coty. I bought 1,000 shares at $31 in 2016, and it crashed before my check cleared. My Wells Fargo broker says I should sell the stock and buy a fancy annuity that actually sounds good. What do you think? — PW, Rochester, Minn.
Dear PW: Coty (COTY-$13.48) completed its initial public offering in June 2013, selling 65 million shares at $17.50 each. Bank of America, Merrill Lynch, J.P. Morgan, “Wells Cargo” and Morgan Stanley headed the syndicate. And zip-a-dee-doo-dah, a few years later, COTY was trading between $30 and $33, with $4.6 billion in revenues and earnings of 50 cents per share. Then, in late 2016, COTY completed its overly big purchase of Procter & Gamble’s cosmetics business for $12.5 billion. This transaction crashed COTY’s market price to the low teens and blistered and traumatized normal balance sheet and income statement numbers. The purchase was too big to chew and a temporary setback. However, management on both teams has finally integrated the products. And according to one of the women at the office next door, the scents still are enchanting and seductive. You can prove it by me.
Today COTY, with a $12.55 book value, manufactures and sells Hugo Boss, Gucci, Calvin Klein, Dolce & Gabbana plus other premium lines. And to make distaff even sexier, this company aggressively encourages women to purchase its damnably expensive skin, nail, eye and hair care products, too, from such brands as CoverGirl and Max Factor. This year, estimated revenues of $9.4 billion from 77 brands should allow COTY to deposit earnings of 70 cents per share on its income statement. And the libidinous cosmetics models are so hauntingly beautiful it’s little wonder a man’s testosterone becomes highly elevated. Even famous Buffalo Bill Cody used a special fragrance by Francois Coty, who, in 1904, founded the company that is now Coty Inc. Buffalo Bill’s breath and body odor were so bad public toilets automatically flushed when he walked by. Coty’s fragrance masked the stink from Buffalo Bill so he could engage the ladies. The company’s motto then was “sell sex appeal,” and today it’s still selling sex appeal.
COTY’s ridiculously expensive products, in collectible Lalique and Baccarat bottles, were designed for the luxury market. COTY’s other fragrances and products are mass-produced but designed to convey images of intimacy, luxury and sex. Yep, intimacy, luxury and sex are responsible for trillions of dollars of our nation’s retail sales. Sex appeal certainly sells more effectively than logic or reason. Just observe the commercials for beer, cars, clothing, mattresses, cola, recreational products and vacation packages ad nauseam. Sex appeal has the whole wide retail world in its hands.
COTY may be the world’s largest manufacturer and distributor of men’s and women’s fragrances, cosmetics, and skin and body care products. Because of the 2016 purchase of P&G’s cosmetics, fragrance and coloring products — plus partnerships with Lady Gaga, David Beckham and Jennifer Lopez — COTY’s revenues grew from $4.35 billion in 2016 to $7.65 billion last year. Net profits have improved from $480 million in 2016 to an expected $530 million this year. And if well-thought-out acquisitions — such as this year’s purchases of Younique and Burberry Beauty — continue, revenues and net income could improve by 70 percent in the coming three to four years. Certainly, the fundamental outlook for this personal care product sub-industry continues to look strong. For the first six months of this year, the S&P index for personal care products increased by 9.8 percent, compared with a 0.6 percent decline for the S&P 500. Wall Street believes S&P’s personal care index will do even better in 2019, especially as more men (even some who are my age) begin to use these beauty products.
In the coming three years, as P&G products segue into COTY’s business model, share earnings, return on total capital and shareholder equity could double. Therefore, COTY could be a $25-$30 stock in a few years. Hold COTY. I think it will return to the $30s by 2023.