What happened

Shares of Coty (NYSE:COTY) were gaining today after the cosmetics company got an upgrade from Citigroup this morning, the latest sign of momentum building in the company's turnaround efforts.

As of 11:29 a.m. EDT, the stock was up 12.4%. 

The actress Zendaya putting on makeup.

Image source: Coty.

So what

Citigroup analyst Wendy Nicholson upgraded the cosmetics maker from neutral to buy and lifted her price target from $4.50 all the way to $10. Nicholson said the company has a lot of "low-hanging fruit" to pick, pointing to accelerating growth, improving margins, and deleveraging in its balance sheet.

Coty is set to complete the sale of Wella, its salon-focused business, by the end of the month to private equity firm KKR for $2.5 billion. That will help the company pay down debt and focus on its prestige businesses, including its recent acquisition of a majority stake in Kylie Cosmetics and 20% ownership interest in Kim Kardashian's beauty business.

The news of successful coronavirus vaccine trials is also bullish for Coty because the company, which is strongest in fragrances, has seen sales plunge along with most discretionary businesses during the crisis, as cosmetics sales are driven in part by social events and office work.

Now what

With today's gains, Coty stock is now up 76% since it reported first-quarter earnings on Nov. 5, posting much better results than expected, including a surprise adjusted profit of $0.11 per share. Revenue from continuing operations still fell 20%, but the company saw strong growth in the online channel and said sales gradually recovered over the course of the quarter.

Even with the recent gains, Coty stock is still down nearly 50% this year, the company is in the midst of a multiyear turnaround that has often sputtered, and it is now in its third CEO in a year. However, the sale of the Wella business represents a new chapter for Coty and will boost its balance sheet. At the same time, the end of the pandemic should provide it with a tailwind next year. Considering the stock could still double by if Coty recoups this year's losses, there is certainly upside potential if it can execute its turnaround plan.

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