Citi Upgrades Coty to Buy: Beauty Brand Poised for Growth Amid Asset Sale News

In an exciting development for investors, Citi has elevated its rating on Coty (NYSE: COTY) from Neutral to Buy. This shift comes on the heels of an anticipated asset sale involving its significant stake in Wella, a German beauty brand, which is expected to unlock substantial value for the company.

Coti’s recent stock performance has been below par, and this reassessment by Citi is backed by a more cautious outlook for the company’s Consumer Beauty segment, which contributes approximately 27% to its revenues. The firm noted that the challenges in this area, along with a tapering effect in the Prestige segment (roughly 63% of sales), have been adequately priced into the stock. Consequently, Citi has set a new price target of $8 for Coty, reflecting a favorable multiple of about 8 times the projected EBITDA for the fiscal year 2025.

Interestingly, Citi's optimism is fueled by Coty’s revised medium-term growth targets, which analysts believe lower the likelihood of future setbacks. The company has adjusted its growth expectations to "above category growth," a significant shift from its previous forecast of 6-8%. Additionally, its EBITDA growth forecast has been revised to indicate "at least mid-single-digit (MSD)%" growth, a departure from the earlier range of 9-11%.

While the top-line growth for Coty has slowed down—plummeting from double-digit increases in FY23 and FY24 to just 1.7% in the first half of FY25—this deceleration can be attributed to economic pressures on lower-income consumers and an ongoing inventory destocking in the Consumer Beauty division. Moreover, the Prestige fragrance sector is stabilizing after years of remarkable growth. Nevertheless, Citi believes these lowered expectations create a more conducive environment for investors.

Analyst Filippo Falorni commented on this reset of expectations, stating that with FY25 guidance and mid-term outlook modifications, Coty now has a "cleaner setup" to meet investor forecasts, particularly if stabilization in replenishment orders occurs. Looking forward, the analyst anticipates a medium-term category growth for Coty in the vicinity of 3-7%.

Even though top-line growth is predicted to remain subdued in the latter half of FY25 and into the beginning of FY26—due to inventory adjustments at retail partners—there’s optimism for a potential growth resurgence as we move into FY26. A significant aspect of Citi's outlook is rooted in their belief that the market has not adequately priced in Coty's roughly 25% stake in Wella, estimated to be valued at about $1 billion. The expected sale of this stake, eyed for completion by the end of 2025, may trigger considerable share repurchase activities, potentially boosting shareholder value.