Investing.com -- Citi hiked its rating on Coty (NYSE:COTY) shares to Buy from Neutral, highlighting a “large value-unlock opportunity” from the anticipated sale of its stake in German beauty company Wella by the end of 2025.
The recent underperformance of Coty stock and adjustments in earnings estimates have adequately factored in the challenges faced by the company's Consumer Beauty segment, Citi notes, accounting for about 27% of sales, and the normalization in the Prestige segment, which makes up roughly 63% of sales.
The firm also raised Coty's price target to $8, based on approximately 8x the estimated EBITDA for calendar year 2025.
Citi's bullishness partly stems from Coty's lowered medium-term targets, which are seen as reducing the risk of future disappointments. Coty has revised its growth outlook to "above category growth," a change from the previous 6-8%, and its EBITDA growth outlook to "at least mid-single-digit (MSD)%" growth from the prior 9-11%.
Coti's top-line growth has slowed, with a notable deceleration from +10%/+11% in fiscal years 2023 (FY23) and 2024, to +1.7% in the first half of FY25. This slowdown is attributed to pressures on low-income consumers and inventory destocking in the Consumer Beauty business, as well as a return to normal in the Prestige fragrance business after years of double-digit growth.
Despite these headwinds, Citi believes that the lowered estimates present a more favorable setup for investors.
“Following the reductions to FY25 guidance and the mid-term algo, we believe investor expectations have now been fully reset, creating a cleaner setup for the company to deliver in-line FY25 results with potential benefits from stabilizing/improvement replenishment orders,” analyst Filippo Falorni said in a note.
Looking ahead, Falorni sees attractive medium-term category growth for Coty in the range of approximately 3-7%.
Although top-line growth is expected to remain below these rates in the second half of FY25 and the first half of FY26 due to retailer inventory reductions, there is potential for growth re-acceleration throughout FY26.
Falorni believes the market is currently not valuing Coty's approximately 25% stake in Wella, which is estimated to be worth around $1 billion. The sale of this stake, targeted by the end of CY25, is expected to lead to significant share repurchases.
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