Coty Stock Soaring on $12 Billion P&G Business Deal

NEW YORK (TheStreet) -- Shares of Coty Inc. (COTY) are gaining by 13.04% to $29.47 in pre-market trading on Tuesday morning, following reports that over the weekend the cosmetics and fragrance company has won an auction to acquire Proctor & Gamble's (PG) beauty businesses.

The assets are valued at about $12 billion, sources told Reuters. The publication added that if the transaction goes through it will be the largest cosmetics deal in at least 10 years and transform Coty into a leader in perfume and hair care.

The transaction, which sources told Reuters could take at least two weeks, will be completed through a "Reverse Morris Trust." What that means is, for tax purposes, P&G will spin off its beauty assets into a separate company which will then merge with Coty.

Separately, TheStreet Ratings team rates COTY INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate COTY INC (COTY) a HOLD. The primary factors that have impacted our rating are mixed-some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, notable return on equity and good cash flow from operations. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Personal Products industry. The net income increased by 129.8% when compared to the same quarter one year prior, rising from -$253.30 million to $75.50 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Personal Products industry and the overall market, COTY INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • COTY INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, COTY INC swung to a loss, reporting -$0.26 versus $0.44 in the prior year. This year, the market expects an improvement in earnings ($0.98 versus -$0.26).
  • Powered by its strong earnings growth of 131.81% and other important driving factors, this stock has surged by 50.52% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, however, we cannot assume that the stock's past performance is going to drive future results. Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere.
  • The debt-to-equity ratio is very high at 7.13 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Even though the debt-to-equity ratio is weak, COTY's quick ratio is somewhat strong at 1.37, demonstrating the ability to handle short-term liquidity needs.
  • You can view the full analysis from the report here: COTY Ratings Report

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