What a brutal six months it’s been for Coty. The stock has dropped 31.4% and now trades at $6.83, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Coty, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.Even though the stock has become cheaper, we're cautious about Coty. Here are three reasons why you should be careful with COTY and a stock we'd rather own.
Why Is Coty Not Exciting?
With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse spanning cosmetics, fragrances, and skincare.
1. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Coty’s margin dropped by 3.7 percentage points over the last year. If its declines continue, it could signal higher capital intensity. Coty’s free cash flow margin for the trailing 12 months was 3.9%.
2. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Coty historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.5%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Coty’s revenue to rise by 4.6%, a deceleration versus its 8% annualized growth for the past three years. This projection is underwhelming and implies its products will see some demand headwinds.
Final Judgment
Coty’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 11.7× forward price-to-earnings (or $6.83 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at Microsoft, the most dominant software business in the world.
Stocks We Would Buy Instead of Coty
The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.
Get started by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.
