Coty stock (NYSE: COTY) is down around 18% since the beginning of 2020, but at the current price of $9 per share, we believe that Coty stock has around 15% potential downside.
Why is that? Our belief stems from the fact that Coty stock is up nearly 1.4x since the end of 2018, and up almost 3x from its low in March 2020. Further, after posting weak Q2 ’21 results, it’s evident that Coty did not benefit from the pandemic, and that cosmetic and fragrance demand has still not fully recovered to pre-Covid levels. Our dashboard What Factors Drove 37% Change In Coty Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Coty stock’s rise since late 2018 came despite a 31% drop in revenues, which combined with a 3% increase in the outstanding share count, led to revenue per share (RPS) dropping almost 35% from $9.32 in FY 2018 to $6.23 in FY 2020 (Coty’s fiscal year ends in June). Also, over this period, the rising cost of sales and operating expenses saw EPS drop from -$0.23 to -$1.33.
Coty’s P/S (price-to-sales) ratio rose from 0.7x in 2018 to 1.13x by 2020-end. The P/S multiple has since risen further to 1.45x, but given Coty’s weak Q2 2021 results, there is possible downside risk for Coty’s multiple.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus and the resulting lockdowns have hurt demand for beauty products. With people not stepping out or going to work, makeup and fragrance products especially have seen a drop in demand. However, demand for hair and skin care products is relatively unaffected, and the combined effect of these two factors is evident from Coty’s Q2 2021 earnings. Revenue came in at $1.46 billion, down from $1.68 billion in Q2 2020. Gross margins, too, dropped from 62.4% to 58.7% over this period. However, the company managed to control operating expenses, and this led to operating margins rising from -4.8% to 1.2%, and net loss from continuing operations also improved to -$19 million from -$101 million.
Despite the economy opening up and people stepping out more, it’s likely that work-from-home will become the new norm, and makeup and fragrance demand could struggle to get back to pre-Covid levels, at least in the medium term.
With revenue expected to stay weak in the near term, even if the company is able to continue controlling expenses, we believe the stock will see its P/S multiple decline from the current level of 1.45x to around 1.35x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $7.50, a downside of more than 15% from the current price of $9.
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