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Coty (COTY) made its public debut on Thursday, June the 13th. Shares of the beauty company ended their first trading day with modest losses of 0.8% at $17.36 per share. Shares saw a slight rebound in Friday's trading session as they closed around the public offering level.

Despite the lack of a first-day jump, shares offer no great appeal both in absolute valuation terms, as well as in comparison to some of its competitors. Investors should stay on the sidelines for now.

The Public Offering

Coty describes itself as an emerging beauty company operating a range of well-known brands in the fragrant, color cosmetics and skin & body care segment.

The company which has been founded back in 1904 operates 10 "power" brands, including Calvin Klein, Davidoff, Marc Jacobs, Playboy and Rimmel among others. These brands are distributed in over 130 countries.

Coty sold 57.1 million shares for $17.50 a piece, thereby raising $1.00 billion. Actually the company itself did not sell any shares, as selling shareholders including the Reimann family sold all the shares in the offering.

The public offering values the equity of the firm at $6.7 billion. The offering took place right at the middle of the preliminary $16.50-$18.50 offer range. Some 15% of the total shares outstanding were offered in the public offering. At Thursday's closing price of $17.36 per share, the firm is valued around $6.65 billion.

The major banks that brought the company public were Bank of America/Merrill Lynch (BAC), J.P. Morgan (JPM), Deutsche Bank, Morgan Stanley (MS), Wells Fargo (WFC) and Barclays, among many others.

Valuation

Coty holds dominant positions in the global beauty market. It is ranked number 2 in fragrances and number 6 in color cosmetics. The company holds leading positions in key North American and European markets, through a wide range of brands to be distributed through a diverse set of sales channels. The company generated roughly 53% of total sales for 2012 from its fragrances, a third from color cosmetics and the remainder from its skin & body care products.

For the year of 2012, Coty increased its annual revenues by 12.8% to $4.61 billion. The company reported a net loss of $324.4 million attributable to its shareholders, compared to a $61.7 million profit a year earlier. Losses were entirely caused by an asset impairment charge of $575.9 million.

Revenues for the nine months ending in March of this year, rose a minuscule 0.1% to $3.59 billion. The absence of large asset impairment charges boosted net profits from $32.9 million in the comparable period last year to $230.3 million. At this pace the company is on track to generate annual revenues of $4.6 billion on which it could report about $300 million in net earnings.

Coty ended the quarter of March 2013 with $782.9 million in cash and equivalents. The company operates with $2.53 billion in total debt, for a net debt position of $1.75 billion. As all proceeds of the offering will benefit selling shareholders, this will remain unchanged.

Based on Friday's closing price, the market values Coty at 1.4 times annual revenues and 22 times annual earnings.

Investment Thesis

As noted above, the offering of Coty has been a bit disappointing. After shares were offered at the midpoint of the preliminary offering range, they fell slightly on their opening day. Factoring in Friday's modest rebound, shares are essentially trading unchanged.

The company operates in a highly competitive industry together with other large names including Estee Lauder (NYSE:EL) and L'Oreal. In comparison, Estee Lauder trades at 1.7 times last year's annual revenues and 19 times annual earnings, valuation multiples which are reasonably in line with Coty. According to the S1-filing of Coty, market researcher Euromonitor expects the global beauty market to grow by 3-4% through 2016.

Coty has many ambitions. The firm generates merely 23% of its revenues in developing countries, thereby being heavily reliant on the US and European markets. The company has announced its intentions to boost skincare offerings as well, a unit which is struggling to break-even at the moment.

Coty's ambitions are well known. The company made a range of acquisitions in recent years, including the almost $1 billion acquisition of OPI and Philosophy, as well as the acquisition of Chinese TJoy for $352 million. These deals have already resulted in large write downs. Last year the company made an attempt to acquire struggling Avon Products (NYSE:AVP), which is currently valued around $10 billion. A deal would have boosted Coty's presence in key emerging markets.

This acquisition driven growth is risky as Coty seems to have a tendency to overpay for its acquisition targets, reporting large write downs in recent times. The modest $0.15 annual dividend, which provides investors with a dividend yield of 0.8% is hardly comforting either. Governance structure issues remains as the Reimann family continues to be in control. Following the offering they hold 70% of the shares and 85% of the voting rights.

I can see why the public offering didn't become a great success. Priced at the midpoint, shares are valued at comparable levels to its larger competitor Estee Lauder which has seen much more solid organic revenue growth and, more impressive earnings growth. The risky acquisition-based strategy to drive growth results in large write downs as well, as Coty has a tendency to overpay for its targets, thereby building up a modest debt position in the meantime.

There is little beauty to this offering, nor compelling reasons to pick up shares at this level. I remain on the sidelines.

Source: Coty - This Public Offer Is Not Beautiful