Author Topic: COTY - Coty Inc  (Read 13858 times)

valueinvestor

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COTY - Coty Inc
« on: February 10, 2017, 03:53:36 AM »
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

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Re: COTY - Coty Inc
« Reply #1 on: February 10, 2017, 04:58:31 AM »
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

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Re: COTY - Coty Inc
« Reply #2 on: February 10, 2017, 06:13:16 AM »
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

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Re: COTY - Coty Inc
« Reply #3 on: February 10, 2017, 06:25:31 AM »
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

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Re: COTY - Coty Inc
« Reply #4 on: February 10, 2017, 06:58:38 AM »
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

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Re: COTY - Coty Inc
« Reply #5 on: February 10, 2017, 07:27:20 AM »
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.
« Last Edit: February 10, 2017, 07:29:06 AM by valueinvestor »

CorpRaider

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Re: COTY - Coty Inc
« Reply #6 on: February 10, 2017, 08:49:28 AM »
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.
« Last Edit: February 10, 2017, 10:10:06 AM by CorpRaider »

valueinvestor

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Re: COTY - Coty Inc
« Reply #7 on: February 10, 2017, 09:29:17 AM »
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

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Re: COTY - Coty Inc
« Reply #8 on: February 10, 2017, 10:14:37 AM »
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

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Re: COTY - Coty Inc
« Reply #9 on: February 10, 2017, 10:17:46 AM »
That is my understanding as well.  I was disappointed when I learned they weren't getting Oil of Olay in the transaction.