On Thursday, Barclays (LON:BARC) issued a downgrade for Coty Inc . (NYSE: NYSE:COTY), adjusting its stock rating from Equal Weight to Underweight. The firm also revised its price target for the company's shares, decreasing it to $7.00 from the previous $8.00. This decision followed the company's recent announcement, which Barclays interpreted as a lowering of Coty's medium-term financial expectations. The significant alteration to the business forecast was not explicitly mentioned in the company's press release.
Barclays has expressed ongoing concerns regarding Coty's strategic direction, citing instances where the company has modified its approach to achieving revenue targets. This marks at least the third time in two years that Coty has recalibrated its operational strategies. The analyst from Barclays noted that despite previous reservations about Coty's shifting strategies, a direct downgrade was delayed due to the stock's valuation compared to its peers.
The need for substantial cost reductions to safeguard earnings before interest, taxes, depreciation, and amortization (EBITDA) was highlighted as a critical factor in the downgrade. With Coty making yet another adjustment to its operating plan, Barclays sees diminished justification for maintaining their previous stock rating.
The analyst's statement pointed out that the changes in Coty's strategy, referred to as "strategy creep," have been a concern for a while. The company's frequent revisions to the components of its revenue strategy have raised doubts about its stability and predictability.
Barclays' revised outlook for Coty reflects a cautious stance on the company's ability to meet its financial objectives in light of the ongoing adjustments to its business plan. The firm's analysis suggests that the potential risks now outweigh the benefits of holding the stock at an Equal Weight rating.
In other recent news, Coty Inc. reported Q1 earnings and revenue that fell slightly short of analyst expectations. The beauty company posted adjusted earnings per share of $0.15, under the consensus estimate of $0.20, and revenue increased by 2% year-over-year to $1.67 billion, just below the predicted $1.67 billion. Despite this, Coty's Prestige segment showed strength with a 5% increase in revenue, while the Consumer Beauty segment saw a 3% decline.
In light of these developments, Coty has adjusted its full-year earnings guidance for fiscal 2025. The company now predicts earnings per share to fall in the range of $0.54 to $0.57, down from the previous forecast of $0.56 to $0.60. Furthermore, Coty expects adjusted EBITDA growth to be near the lower end of its prior 9-11% target.
However, Coty maintains its free cash flow growth forecast in the low to mid $400 million range for fiscal 2025, and reiterated its aim to reduce leverage to below 3x by the end of 2024. These are among the recent developments for Coty Inc. in the financial landscape.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Barclays' downgrade of Coty Inc. (NYSE: COTY). The company's market capitalization stands at $6.45 billion, with a P/E ratio of 85, significantly higher than the industry average. This elevated valuation aligns with Barclays' concerns and is reflected in the InvestingPro Tip that Coty is "Trading at a high earnings multiple."
Despite these challenges, Coty maintains impressive gross profit margins, as highlighted by another InvestingPro Tip. The company's gross profit margin for the last twelve months as of Q1 2023 was 64.93%, indicating strong pricing power in its product lines. However, this strength is tempered by the fact that Coty's short-term obligations exceed its liquid assets, potentially adding pressure to its financial flexibility.
The market's reaction to Coty's strategic shifts is evident in its recent stock performance. InvestingPro data shows that Coty's stock price has fallen significantly over the last three months, with a 6-month price total return of -33.06%. This decline supports Barclays' decision to downgrade the stock and lower its price target.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Coty, providing a deeper understanding of the company's financial health and market position.
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