Coty’s stock price has taken a beating over the past six months, shedding 29.9% of its value and falling to $4.22 per share. This was partly driven by 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? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Coty Will Underperform?
Even with the cheaper entry price, we don't have much confidence in Coty. Here are three reasons you should be careful with COTY and a stock we'd rather own.
1. Core Business Falling Behind as Organic Sales Decline
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
Coty’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 4.3% year on year. 
2. Projected Revenue Growth Shows Limited Upside
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 stall, a deceleration versus This projection is underwhelming and implies its products will face some demand challenges.
3. Previous Growth Initiatives Haven’t Impressed
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 2.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
Coty falls short of our quality standards. After the recent drawdown, the stock trades at 8.3× forward P/E (or $4.22 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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