Morgan Stanley Sees Weak Fundamentals In Coty, Downgrades Stock To Underweight

• Shares of Coty Inc COTY have been rising steadily in 2015 and are up 40 percent year-to-date.
• Morgan Stanley’s Dara Mohsenian downgraded the rating on the company from Equal-Weight to Underweight, while maintained a price target of $26.
• Investors are likely to start valuing the company in terms of its fundamentals and integration efforts, Mohsenian stated.

Analyst Dara Mohsenian mentioned that Coty’s current valuation is too high given the weak underlying fundamentals of the company’s heritage and acquired businesses. He added that there is “significant execution risk.”

Coty’s share price has nearly doubled in the last 18 months, as the company responded to weak organic sales after its IPO with significant cost cutting measures, while also enhancing shareholder value through M&A and repurchases, Mohsenian noted.

The analyst expects these drivers to lose steam in the near future as the company’s balance sheet leverage reaches the high end of that of its peers. Also, Coty is expected to focus on integrating its recent acquisitions before pursuing any additional deals.

Mohsenian also believes that share repurchases would be restricted for two years after the closure of the PG RMT deal. Cost cutting potential at Coty’s heritage business is also likely to become less important on a much larger EBITDA base, thus limited potential upside.

“Coty's worse fundamental outlook than peers, much higher execution risk, and less balance sheet flexibility, mean that the stock should trade at a valuation discount to peers,” the analyst commented.