Coty May Not Be So Pretty, According To Adjusted Valuations

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Summary

  • Using Adjusted Earnings, COTY’s Adjusted Return on Assets was 24% in 2015 – much higher than the traditional 5% ROA most financial databases report.
  • This difference is primarily caused by COTY’s $1.8B goodwill, which significantly distorts the firm’s economic reality.
  • Also of note is the difference between COTY’s Adjusted Value-to-Assets ratio of 7.0x versus the firm’s traditional forward P/B of 78.9x.

Performance and Valuation Prime™ Chart

The PVP chart above reflects the real, economic performance and valuation measures of Coty Inc. (NYSE:COTY) after making many major adjustments to the as-reported financials. The four panels explain the company's corporate performance and valuation levels over the past 10 years plus best estimates for forecast years based on quarterly financials and consensus estimates.

The apostrophe after ROA', Asset', V/A', and V/E' is the symbol for "prime" which means "adjusted." These calculations have been modified with comprehensive adjustments to remove as-reported earnings, asset, liability, and cash flow statement inconsistencies and distortions. To better understand the PVP chart and the following discussion, please refer to our guide here.

The problem with Generally Accepted Accounting Principles (GAAP) is that they create inconsistencies when comparing one company to another, and when comparing a company to itself from year to year. By making adjustments, we aim to remove the financial statement distortions and miscategorizations of GAAP. Some of these can be automated through consistently applied formulas; however, many must be made manually. Manual adjustments that cannot be automated include mergers and acquisitions accounting, special charges, business impairments, and others. The practice of creating consistent, apples-to-apples comparable measures of financial performance is often considered either tedious or overly complex by even seasoned financial analysts.

Under GAAP, the as-reported financial statements and financial ratios of COTY do not reflect economic reality. The traditional ROA computation understates the company's profitability by incorrectly including certain items. The distortion of COTY's profitability measures and valuation metrics are primarily driven by the inclusion of the firm's goodwill ($1.5bn) and other intangibles ($1.9bn), which inflate the firm's asset base.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates COTY's Adjusted Return on Assets as 24% in 2015. In contrast, most financial databases show a traditional

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Valens Securities is a boutique research firm with 90+ professionals, housing truly unique, disciplined, and unbiased research systems for equity analysis, corporate credit, and macroeconomic strategy.Valens provides institutional investor clients with various tools designed for each level of the investment process.Sign up for our daily newsletter hereAssociated Accounts: Valens Research provides data to SA contributor Altimetry

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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