Cosmetics company Coty livened up our preholiday dog days by filing for an initial public offering. The IPO is valued at $700 million, according to the document filed with the SEC, which says the stock will trade on either the NYSE or Nasdaq under the ticker COTY.
Scrolling down hundreds of pages and doing a number of back-of-the-envelope calculations, Coty doesn't look too pretty without its makeup.
The company makes fragrances -- designer lines for names like Calvin Klein and Vera Wang and celebrity scents by the likes of David Beckham and Lady Gaga -- and color cosmetics brands such as Rimmel, NYC Color, and Sally Hansen. Many of its brands have come in through acquisitions, the latest being TJoy Holdings, OPI nail colors, and Philosophy skin care.
And the market has not been kind to discretionary purchases recently, even as we await a recovery. Coty's income has been in decline, from $0.36 per share in fiscal 2009 to $0.18 in fiscal 2011. And fiscal 2012 is not an improvement. Earnings per share came in at $0.09 for the nine months ending March 31, compared to $0.19 for the same period in fiscal 2011.
Coty's hunger for acquisitions has been a big part of the profit drag. While the company's fragrance and cosmetics segments are generating increased earnings, the problem area has been skin and body care, which is posting an operating loss of $73.4 million so far this fiscal year. Coty blames that on impairment charges related to brands that came in with its acquisitions of Philosophy and the Chinese brand TJoy last year, and calculates that segment would have grown income 75% without those issues.
Excluding all the acquisitions costs and charges, Coty's owners calculate the company would have made net income of $303 million so far in fiscal 2012, a 27% increase over fiscal 2011. Using the company's tally of 381.9 million shares outstanding, that works out to earnings per share of roughly $0.79.
According to the filing, management pegged the most recent fair value of outstanding shares at $14, which, at the rough $0.79 estimate, gives us a P/E just under 18. Not too bad, when you consider the other pure-play cosmetics companies in the market. Avon (NYSE: AVP) is trading at 17 with all its issues, Revlon (NYSE: REV) is at nearly 15 and Estee Lauder's (NYSE: EL) P/E is almost 27.
But Lauder is the gold standard, a well-run company with superior brands and top-notch distribution in department stores, airport shops, and its own retail channels. Coty's brands don't have the rep of MAC, Aveda, and Clinique, or their reach. And the fact that Coty was circling Avon repeatedly would spell trouble for a prudent investor. As we've said here before, a battle to take over Avon's troubles would have been a bad idea.
At $14 per share, the $700 million valuation for the IPO would mean about 50 million shares are being sold, which is only 13% of the nearly 382 million outstanding. That leaves a lot of control in the hands of current owners, and not much incentive to depart from their deal-making jones. The SEC document says "acquisitions are not essential" to growth, but the many references to seeking deals and expansion in the text hint at more shopping trips in the future.
Even if the $700 million figure is just a placeholder for the actual number, the filing does point out JAB Holdings -- an arm of holding company Joh. A. Benckiser -- will remain in control after the IPO.
If you really want to play with makeup, skip Coty and buy Lauder instead. It has the goods to deliver on that rich P/E, it's way off its 52-week high and its target consensus of $66, and it pays dividends. It's all around a safer, more valuable play.
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