Why the Coty Inc (COTY) IPO Didn’t Perform

As happens all too often in the markets, an IPO has come out with lots of hype and, ultimately, little in the way of delivered expectations. Women’s fragrance giant Coty Inc (NYSE:COTY) raised one of the largest IPOs in consumer product history last week, earning more than $1 billion. In the days prior, Wall Street played up the IPO in classic fashion — citing large brand product awareness and celebrity endorsements as cause for investment. While Fools already know this is not a real reason to buy, apparently the market was either inundated with quick-flipping traders, or just unimpressed by the scent of Coty.

Coty Inc (NYSE:COTY)

The situation
Coty Inc (NYSE:COTY) is a very old, very large maker of women’s fragrances — from Calvin Klein to Adidas. Prior to its IPO, the company was most recently in the news for its proposed near-$11 billion buyout of beauty-product multilevel marketer Avon Products, Inc. (NYSE:AVP). The acquisition failed, though in my opinion this was an OK turnout for Coty.

The thing is, this IPO was never really for shareholders, but for the company’s owners. Out of the $1 billion raised yesterday, the third-largest IPO of 2013, approximately zero of it went to operating business.

Moreover, the IPO implies an enterprise value for Coty Inc (NYSE:COTY) of roughly $8.6 billion. Last year, the company hit $761 million in adjusted EBITDA, implying an EV/EBITDA of 11.3 times. For a price-conscious investor, this is a little much to pay for the mature-state company that will likely only meaningfully grow via acquisition in the future. On a price-to-free cash flow basis, the company trades at 19 times  trailing one-year FCF.

For comparison, take LVMH. It’s a larger and more diversified luxury brand holding company, and therefore not a pound-for-pound competitor, but it trades at an EV/EBITDA of 9.7 times. On the other hand, L’Oreal trades at more than 16 times.

Coty surely isn’t the most overvalued IPO of the year (there are plenty of tech companies to take that cake), but it certainly is not one that value-oriented investors would take a look at.

Looking forward
Coty Inc (NYSE:COTY) does have an impressive roster of brands (Davidoff, Playboy, etc.), even if the company’s name itself is not a household term. Investors may have been more jazzed about the IPO if the proceeds could have gone to the company itself — perhaps toward a high-value-added acquisition.

Coty Inc (NYSE:COTY) has the potential to be an anchor-style long-term pick, but investors need to take a deep look at the company and its management practices over the years. As a company with a century under its belt, it’s highly unlikely Coty will go to zero, but it’s important to be in a well-managed company and at a price that compels the wallet.

The article Why the Coty IPO Didn’t Perform originally appeared on Fool.com and is written by Michael Lewis.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!