By Alex Gavrish, Etalon Investment Research; and author of Wall Street Back To Basics

Coty

IPO mishap

Coty Inc (NYSE:COTY), a leading manufacturer of fragrances, color cosmetics and skin & body care products, was listed in New York in June 2013. Existing shareholders sold 57 million shares in an initial public offering at $17.50 per share. Company’s majority shareholder (69%) is JAB Holding, otherwise known as Joh. A. Benckiser GmbH, an investment company of the Reimann family, one of Germany’s wealthiest families. Last year the holding acquired D.E. Master Blenders NV for 7.5 billion euros. Other main shareholders are private equity funds managed by Rhone Capital LLC and Berkshire Partners (unrelated to Warren Buffett’s Berkshire Hathaway). They own 5% and 4% stakes, respectively.

Recently a number of shareholder lawsuits were filed against the company. It is quite possible that the reason for shareholder lawsuits is lackluster share price performance. While IPO was done at a reasonable x12.5 EV/EBITDA multiple (FY 2013 EBITDA) valuation, some shareholders were probably disappointed by a share price decline of 22% over the first 7 months since IPO. Compare this to a decline of 31% in the shares of Facebook during first 7 month since its IPO in May of 2012.  Apparently investors expect declines and volatility from a high-growth stock such as Facebook but not from a stable, cash-flow generative consumer staples company. To give the company management some due credit, on February 14th, 2014 they did announce a share repurchase authorization in the amount of $200 million.

Company profile

Coty Inc (NYSE:COTY) is a pure-play beauty company with a portfolio of brands that compete in three segments: Fragrances, Color Cosmetics and Skin & Body Care. Coty holds #1 global position in Fragrances, #6 global position in Color Cosmetics and has a strong regional presence in Skin & Body Care. Company’s top brands include adidas AG (ETR:ADS), Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen. Coty Inc (NYSE:COTY)’s brands are sold in over 130 countries and territories.

Valuation review

As of March 7th, 2014 close, Coty Inc (NYSE:COTY) had a market capitalization of $6 billion and an enterprise value of $7.5 billion. During the fiscal 2013 year, company generated $4.7 billion in revenues, $394 million in operating income, $464 mil in cash flow from operations and $270 mil in free cash flow. In terms of valuation, company is currently trading at an EV/EBITDA multiple of x11.4 (based on FY 2013 financials), P/S ratio of x1.3, P/E multiple of x35.8, and has a free cash flow yield of about 5% percent. During first half of fiscal 2014, company paid a small dividend of $0.2 per share which equals to a 1.3% dividend yield. Fragrances are an attractive product category both because of its value proposition and strong position in stores. One can much more easily afford designer fragrance as opposed to other luxury products. At the same time, fragrances and cosmetics is a category that has a highly visible position in stores. Company’s current valuation is reasonable but it remains to be seen how Coty Inc (NYSE:COTY) performs as a public company. It had already learned the first lesson.

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