On Thursday, TD (TSX:TD) Cowen adjusted its stance on Coty Inc . (NYSE: NYSE:COTY), raising the company's stock rating from Market Perform to Outperform and increasing the price target to $16.00 from the previous $13.00. The upgrade comes after a fireside chat with Coty's Chief Brands Officer of Consumer Beauty, Stefano Curti, and insights from the company's presentation at the Consumer Analyst Group of New York (CAGNY) conference.
The firm cited several reasons for the optimistic outlook, including Coty's solid momentum in the fragrance sector, which accounts for approximately 55% of the company's sales. The analyst highlighted the new ways younger generations are engaging with fragrances, signaling a robust market for Coty's products. Additionally, opportunities for diversification and premiumization across different regions and product categories were key factors in the upgraded rating.
Coty's efforts to modernize its Consumer Beauty division, which represents 38% of its sales in fiscal year 2023, were also noted as a positive development. The division is known for its high brand awareness but is undergoing product and marketing transformations to stay competitive. Furthermore, Coty's strong cash generation contributing to reduced debt leverage was another aspect that supported the upgrade.
The firm also pointed out Coty's potential for margin expansion compared to its peers. Coty's gross margin currently stands in the low 60% range, whereas competitors like L'Oréal (EPA:OREP) and Estée Lauder (NYSE:EL) boast margins in the low 70%. Increased penetration in prestige segments and Asian markets, along with ongoing cost-saving initiatives, are expected to drive Coty's margins higher.
Lastly, the valuation gap between Coty and its global beauty peers was addressed. Coty trades at approximately 22 times forward-year earnings compared to the 32 times average of its peers. The analyst expressed confidence that this gap would continue to narrow as Coty progresses in its strategic diversification and category expansion.
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