Berenberg Upgrades Coty, Says Too Early to Buy

Coty's  (COTY) stock rating was raised to "hold" from "sell" at Berenberg on Friday following its recent share price underperformance.

The stock was in part pressured by "disappointing" results for the 2017 fiscal first quarter earlier this month, the firm noted.

"Headwinds arose in: fragrances, with wholesale inventory reductions, liquidity issues for a Chinese distributor and underperforming brands all weighing on growth; nail cosmetics, as the U.S. category, in which Sally Hansen is market leader, suffered double-digit declines; and body care, with adidas and Playboy losing ground," Berenberg wrote in an analyst note.

But the firm believes revenue declines will ease in the second half of 2017 as "distractions" from its recent merger with Procter & Gamble's (PG) specialty beauty business subside and headwinds ease. Chairman Bart Becht attributed the slump in first-quarter revenues and profits to distractions caused by integrating P&G's unit.

"People are not necessarily fully focused on the business for a period of time because they're in transition, or alternatively they're also helping out in the integration...Those two factors have caused distraction and have caused us to lose momentum in the business," Becht said on last week's earnings conference call.

Berenberg remains cautious about Coty's growth outlook due to its "high exposure to mass fragrance and nail cosmetics (both of which are seeing category weakness), the underperformance of key color cosmetic brands (CoverGirl and MaxFactor) and ongoing complexities associated with the transaction."

However, the firm does not believe top-line growth will deteriorate and downside to valuation is limited. Berenberg also lowered its price target to $18 from $23.

Shares of Coty were increasing 0.43% to $18.68 in mid-afternoon trading today. The stock is down more than 27% year-to-date.

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