COTY - Coty Inc

[valueinvestor]

Declined by ~9%

 

This one has been bothering me for a while, but it seems the investment thesis is whether the market will eventually recognize this as another Estee Lauder and/or Loreal, which also relies heavily on the fact whether Coty can become one, if not, better.

 

Coty is a beauty company with JAB being a major holder. Back of the envelope, Forward Owner's Earnings/EV seems to be ~18x (20x when discounting for PV at 10% discount rate) - excluding Younique acquisition for the year 2019.

 

Currently, they occupy #1/#2/#3 in cosmetics, body+hair, fragrance categories, only being topped by Estee Lauder or Loreal.

 

Also, the industry trend for beauty seems to be positive for large and recognizable players, especially with the inception of the Honest Company (founded by Jessica Alba), where people do care about what they put on their face, hair, and body.

 

Specifically being wary of unknown brands that can possibly hold carcinogenic compounds that can be detrimental to one's health, over the long-term. So once they find a skincare/beauty routine, they tend to stick with it.

 

Risks are that they have been acquisitive, not sure if they are opportunist or short-termers, but at the end of the day to buying the #1 or #2 or #3 player in different beauty segments for ~18x-20x OE/EV seems reasonable.

 

Haven't started a position, and done extensive research to the extent that I believe the members here have more insight into Coty than I would ever have at the moment.

[CorpRaider]

Thanks for sharing your thoughts.  I'm pretty sure there's an existing thread.  Sounded like they aren't done with the acquisitions on the conference call when they declined to give an upper leverage limit stating, basically, it would depend on how large an acquisition they made.

[valueinvestor]

Thanks for sharing your thoughts.  I'm pretty sure there's an existing thread.  Sounded like they aren't done with the acquisitions on the conference call when they declined to give an upper leverage limit stating, basically, it would depend on how large an acquisition they made.

 

My apologies if that's the case, it wasn't intentional. Thanks for letting me know regarding the leverage, it is helpful to figure out where this company is going in the next decade.

[rogermunibond]

I couldn't find an existing thread, so might as well keep posting here.  They've been hunting for an acquisition for a while.  Buffett was involved briefly when he was going to back their attempted buyout of Avon.  That didn't happen.  For me there are a number of positives that make me comfortable to buy and hold COTY at this price. 

 

1) JAB backing

2) JAB backing

3) JAB backing

 

These guys have done well with RB, are in the early days of their coffee roll-up vehicle, and beauty/cosmetics has similar characteristics with good margins, growth, etc.

 

COTY has disposals coming too, & we need to see how new division leadership can re-energize Covergirl in NA. 

[bskptkl]

There is a decent write up on VIC that should be available for public viewing (posted 12/23).

I own this because I messed up on about half of the exchange with PG - thought it would bounce back instead of whacking the bids...

I think some smart guy like Burry owns too.

I wouldn't normally own - seems rather richly priced.

[valueinvestor]

There is a decent write up on VIC that should be available for public viewing (posted 12/23).

I own this because I messed up on about half of the exchange with PG - thought it would bounce back instead of whacking the bids...

I think some smart guy like Burry owns too.

I wouldn't normally own - seems rather richly priced.

 

Valuation does not seem to be too big of a problem, since I would've been happy to pay 20x for Loreal, Estee, etc during the late 90's.

 

Surprised Michael Burry bought into the name, not sure what he sees.

 

However thank you for the referral, it is much appreciated.

 

[CorpRaider]

Yeah I remember us talking about those points before Roger.  Isn't the timing on the reporting such that Burry could have been putting on an arb spread?  I have been waiting to see his updated filing.  Seems like they were looking for an acquisition for a long time but just swallowed a whale, which is why I found the discussion of additional acquisitions (large?) to be disconcerting.  Personally, expecting an annus horribilis this year with integration problems and the anticipated turn in business getting pushed back further, but I suppose that's just speculation/pessimism about large mergers/hope for a decent price.

[valueinvestor]

Yeah I remember us talking about those points before Roger.  Isn't the timing on the reporting such that Burry could have been putting on an arb spread?  I have been waiting to see his updated filing.  Seems like they were looking for an acquisition for a long time but just swallowed a whale which it why I found the discussion of additional acquisitions (impliedly large) to be disconcerting.  Personally, expecting an annus horribilis this year with integration problems and the anticipated turn in business getting pushed back further, but I suppose that's just speculation/pessimism about large mergers/hope for a decent price.

 

That's certainly a concern, which is why I'm holding off at the moment. It does not seem the first time that JAB brought a company to the public markets, therefore maybe their track record may shed some light? However, does anyone has any thoughts on the underlying economics of the business? It seems they do market products under valuable brands, and yet don't have the trademarks? As opposed to Estee Lauder that has MAC and Loreal with Lancome, for instance. If we can figure out the quality of the underlying economics, then one would be more comfortable buying it now and averaging down if the restructuring issues turn out to be temporary.

[rogermunibond]

Luxury fragrance is a licensing business - Boss, CK, Marc Jacobs etc.

 

The other parts, Professional and Consumer Beauty/Hair, they own the brands and manufacture the products.  Rimmel, Sally Hansen, now with P&G they own the Covergirl, Max Factor, Clairol, Wella brands

 

 

[CorpRaider]

That is my understanding as well.  I was disappointed when I learned they weren't getting Oil of Olay in the transaction.

[LowIQinvestor]

I'm new to Coty but this transaction with Younique (a makeup MLM) looks insane to me:

 

https://www.coty.com/news/coty-enter-partnership-younique-leading-online-peer-peer-social-selling-platform-beauty

 

"Coty will acquire a 60% stake of Younique for approximately $600 million in cash which will be funded through a combination of cash on hand and available debt facilities with marginal impact on Coty’s leverage ratio."

 

 

[valueinvestor]

Glad I'm not the only one; Herbalife of makeup?

 

Surprisingly it doesn't seem to be a bother; if they can achieve a high rate of return on their investment over a long-term. Younique already has $400M in revenue, and Coty probably thinks there are considerable synergies involved. However there are inherent limitations to MLMs where they cannot grow for decades on end because soon their distributor/presenter base will saturate. The only way to grow by then is to rely on the promotion of the product.

 

However there are probably other ways to invest $600M? Maybe taking a position in an undervalue beauty/cosmetics company? Unless the reason why they invested is that they believe an annualized return of >50% on their investment is certain.

 

Now that I think about it .. isn't Avon an MLM company? Maybe they think that Younique has a competitive advantage over companies such as Avon? Maybe even better economics?

 

 

[solobz]

I've looked at this a couple times since the P&G deal. I want to be interested in it given the sell off, but seems like a show me story at this point. Management seems to have an appetite for more M&A and it's hard for me to get comfortable with it until they can show some progress on the current product portfolio. That said, I don't hate selling some OTM puts on it.

[valueinvestor]

Agreed. More research must be done at this point to see if this business can be killed, and if so, how?

[CorpRaider]

Apparently JAB is a buyer @ around $18.50.

[tylerdurden]

Is there a particular reason for the price jump in last two days? I don't think Michael Burry filed a 13F for last quarter since the AUM fell under the threshold so we won't know whether he will be sticking with this going forward.

[valueinvestor]

At the moment, I've decided to move on and waiting for a better entry point. Not entirely sure why the stock has risen over the last few days, but it would be nice to know.

[CorpRaider]

I dunno, JAB filed some forms 4 indicating they took down like $80MM in open market purchases of stock since 02/10/17, but I'm sure you saw that.

[valueinvestor]

lol I haven't lmao, not sure why.... thanks again. You've been great helping with Coty Inc.

[jouni1]

Apparently JAB is a buyer @ around $18.50.

i continue to hold, bought at the last time we were at 18.5. everything seems to be going as planned.

[CorpRaider]

Sure.  I own zero but am watching it, just like POST.  It will therefore likely take off, while I continue to buy/own garbage like GM.

[tylerdurden]

Sure.  I own zero but am watching it, just like POST.  It will therefore likely take off, while I continue to buy/own garbage like GM.

 

Haha. We are in the same camp in terms of both names I guess. In terms of the story for Coty, is this mostly about talented management, some from RB I believe, using their magic and turning this around? I didn't see any other potential reason to invest in this name so far.

[rogermunibond]

That plus JAB Holding and their three headed management group of Goudet, Becht, and Harf.

 

http://www.jabholco.com/

[valueinvestor]

Decided to start a small position today (less than ~2.5% of portfolio), because it seems the Younique acquisition makes sense. Avon is struggling because they do not have the infrastructure that Loreal, Estee, and Coty has which is why Coty made an offer for Avon, I believe. It is a great way to create products with the infrastructure for Younique, and if brand segmentation needs to be done, it can be done.

 

Though I am not a big fan of MLM, maybe these folks have a better idea than I do (certainly a better track record). It is selling for ~20x Forward OE/EV (earnings discounted to PV at a rate of 10%). If it needs to averaged down when the time comes, I'm sure I would be happy to do it.

[kab60]

I spent a little time on this (I own Revlon), but apart from the obvious integration/execution issues (no wonder with such a big acquisition) it bothers me they have a 2020 adjusted EPS target (some 1,51 USD per share). WTF is up with that. They seem determined to reach it if not organically then through other acquisitions. Doesn't exactly sounds value accretitive. And it gives me pause when the CEO keeps repeating that buying Younique was for strategic reasons. In my book that's usually a red flag and means you're willing to pay too much. Sure, you might get growth when you at the same time divests 6-8% of sales (probably the shitty products), but did you create value or not for shareholders? Not really sure what to think of JAB. I think they did some very expensive (at least optically) acquisitions before. Haven't spent a lot of time on this, the CEO obviously rubs me the wrong way, but at least on first glance he has a very impressive resumé, so I might be completely wrong.