New Strategy, Resumed Coverage On Coty

• Coty, Inc. COTY has seen a more than 45 percent increase in its share price, year to date.
• Morgan Stanley’s Dara Mohsenian has initiated coverage of Coty with an Equal-Weight rating and price target of $31.
• The company’s has signed a definitive agreement with Procter & Gamble Co. PG to merge a part of the latter’s beauty assets with Coty.

The transaction, signed in July, was structured as a tax-free Reverse Morris Trust transaction and is expected to create the third largest beauty company in the world, “with pro forma sales of ~$10 billion in the ~$300B global beauty industry,” according to the Morgan Stanley report.

Mohsenian also believes that this transaction would help diversify Coty away from the fragrance segment, while offering greater geographic, channel and sub-category scale, thereby meaningfully improving its partnerships with retailers.

However, topline is expected to continue to be constrained due to the company’s “sub-optimal business mix,” compared to its “structurally higher-growth beauty peers.” Also, given that the business that Coty is acquiring from Procter & Gamble has been declining in recent times, the company would need to work on reinvigorating the business.

On a more positive note, Coty’s offers strong visibility into its ability to continue to drive robust profit growth, given the company’s existing cost savings program. In addition, the management has a strong focus on productivity and is willing to use the balance sheet to create shareholder value via accretive acquisitions and share buybacks.