Coty Inc (COTY): Watch Out with This Cash-Out IPO

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Investors did not show much enthusiasm at Coty Inc (NYSE:COTY)‘s recent IPO. The fragrances and cosmetics company raised  $1 billion by selling shares at $17.50 apiece and the stock’s price still remains idle. There were two primary reasons for the lack of interest among investors.

Coty Inc (NYSE:COTY)

First of all, the IPO was a cash-out from the company’s owners. Mr Benckiser, Coty Inc (NYSE:COTY)’s biggest shareholder and the holding company for Germany’s Reimann family, are selling down their stake. Other shareholders, such as Berkshire Partners and Rhône Group, are also selling down their stakes through the offering.

Secondly, the shares that are being sold do not hold the same political power as the ones being held by the groups that control Coty Inc (NYSE:COTY). Even though all shares will have the right to receive the same cash dividends (for the moment $0.15 a year per share), the new share class created for the IPO will grant investors 10% of the voting rights held by existing stakeholders.

Taking a look at relative valuation

But what about Coty Inc (NYSE:COTY)’s valuation against its peers? The company, which produces the fragrances for “A” list luxury brands such as Bottega Veneta, was sold at an adjusted 24 times its price-to-earnings ratio, which is reasonable compared to its closest rivals. Companies such as the French giant L’Oreal, which trades at 24.5 times its 2013 price-to-earnings ratio, or Estee Lauder Companies Inc (NYSE:EL), which trades at 26 times its 2013 price-to-earnings ratio, all trade within the same multiple range. Even if it Coty does not seem relatively expensive, the company has many differences when compared to the likes of Lauder and L’Oreal.

First of all, Coty Inc (NYSE:COTY) has not grown its top line in the last nine months, while L’Oreal is expecting to grow sales by 5.5% in 2013 (after growing sales by the same amount in 2012.) Lauder (which owns brands such as Clinique, M.A.C and Bobbi Brown) is growing sales at a seemingly low 1.95% year-over-year rate, but the company is growing its earnings-per-share by 18.4% year-over-year. Lauder’s operating margins of 10.1% also outshine Coty’s 7.6% operating margins.

Coty Inc (NYSE:COTY)’s management may argue that its slow growth is due to its high exposure to European markets (which comprise 47% of the company’s sales), but those claims become invalid when we look at L’Oreal’s first quarter results. The French beauty giant is not only growing its sales but is also gaining market share in the developed world. The company’s organic growth of 5.5% was also a result of its performance in developed markets. L’Oreal posted an impressive 6.3% organic growth in the US, 1.7% growth in Western Europe and 9.4% growth in emerging markets.

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