Morgan Stanley Resumes Coverage On Coty, Says Storyline Is Priced Into Current Valuation

Morgan Stanley’s Dara Mohsenian believes that the weak positioning of Coty Inc COTY within the beauty industry, along with high execution risks, are already priced into the valuation discount of the stock, compared to its CPG peers.

Mohsenian re-initiated coverage of the company with an Equal-Weight rating and price target of $24.

Weak Positioning

“We continue to view Coty as disadvantaged within the attractive beauty category,” the analyst mentioned, while pointing out that the stock has declined 26 percent from its May peak.

Mohsenian expects the stock to continue to be under pressure in the near term, driven by weak top line results, which in turn are expected due to the soft scanner data and distractions due to the Procter & Gamble Co PG deal.

“However, as we move close to the summer of CY17 we do see eventual trading upside as the market focuses more on FY18 at some point and Coty provides greater financial clarity,” the analyst went on to say.

Reasons For Weakness

Mohsenian believes Coty is skewed to lower growth subcategories and price points in the beauty space than its large public peers.

In addition, the company’s brands entail weak brand equity, which is highlighted by Coty’s historical market share losses.

According to the Morgan Stanley report, “Coty licenses about 40 percent of its portfolio, which means it deserves a lower valuation for lack of ownership. Working with third parties also makes Coty's portfolio more complex to manage, particularly as the company tries to cull SKUs.”

There have been reports that Coty intends to acquire U.K.-based Good Hair Day, a manufacturer of high end hair care products, for significantly more than £400 million.

In fact, Moody’s sees this acquisition as credit negative for Coty.