New Strategy, Resumed Coverage On Coty

• Coty Inc (NYSE: 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. (NYSE: 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.

Related Link: Procter & Gamble's Discount Expected To Continue

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, 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.