Coty's Global Reach Should Give IPO Price a Makeover

NEW YORK (TheStreet) -- The year 2013 was full of initial price offerings in a range of industries. Many of those in the technology and medical fields performed well and saw great price increases on their first day of public trading. Coty (COTY), a fragrance and cosmetic company, did not see the expected first-day trading boost. Now it has shares trading near all-time lows six months later.

Coty is the consumer product company behind brands like OPI, Rimmell, Sally Hansen, philosophy, and Chloe. The company also licenses perfumes with brands like Adidas, Playboy, Calvin Klein, and Marc Jacobs. The company was the number two fragrance company and number six color cosmetics company in the world at the time of its IPO. The company competes against rivals L'Oreal, Elizabeth Arden (RDEN) and Revlon (REV).

I was bullish on Coty prior to the IPO and remain even more bullish now. The recent excitement comes from several international deals that gives Coty a better handle on distribution and brand power in emerging markets. The deals also further one of the IPO themes Coty gave: to "diversify our geographic presence into new and emerging markets."

On Dec. 23, Coty announced a joint venture with Chalhoub Group and Jashanmal. The new venture, called Coty Distribution Emirates, gives Coty better control of its brands and distribution in one of its most exciting region. Chalhoub has been a partner with Coty since 1995 and is one of the leading Middle East companies. It has a presence in 14 countries and over 500 retail outlets.

The Middle East has been a focus for the company and is one of its best-performing geographical regions. The region saw double-digit growth in the fourth quarter. It was again cited as one of the top performers for the company's Europe, Middle East and Africa geographic segment in the first quarter. All told, EMEA was the top geographic region for Coty in fiscal 2013, with net revenues of $2.2 billion, compared to $1.9 billion for the Americas region. If this new joint venture can keep up the double-digit pace, the Middle East region should continue to be one of the key growth drivers going forward.

Another recent international deal saw Coty create a subsidiary in South Africa. A new agreement with Indigo Brands will see Coty's new unit cover 14 countries. This unit also gives Coty greater control of its brands' marketing, pricing and advertising.

Earlier this week, Coty bought Lena White, the independent distributor of OPI Brands in the United Kingdom for the last 30 years. In 2010, Coty acquired OPI for around $1 billion to boost its color cosmetics market and better compete with L'Oreal, owner of the Essie Cosmetics brand.

At its IPO, shares of Coty were priced at $17.50. Although the IPO raised $1 billion, the shares immediately fell on the open market. Over the last 52 weeks, shares have traded in a range of $14.46 to $17.74. The company has seen shares fall as worries about the Americas segment and stalled growth stay fresh on investors' minds. In the recent first quarter, total revenue fell 3% to $1.2 billion. The Americas segment was the weakest with a 10% drop in total revenue. EMEA and Asia Pacific regions saw growth of 2% and 7% respectively.

Still, the recent international deals and a better control on margins through distribution should go a long way toward boosting revenue and earnings per share. With these changes, Coty shares could see a return to the $17.50 IPO level, and might even trade higher than that price in 2014.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Author holds no positions in any companies mentioned. 

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