The S&P 500 has roared back to life in 2019 following a dismal December performance that left investors on edge about what the upcoming year would hold in store. The index is up more than 18% from the Dec. 24 bottom, and several companies have led the pack more than others.
The top gainer so far this year with a 68.3% return is Coty Inc. (COTY), which the majority of the investing public wouldn’t expect from a cosmetics company with an $8.3 billion market cap and little brand recognition. But that under-the-radar performance makes it all the more important to dive into as markets remain jittery amid weakening global growth and political in-fighting.
Here’s what’s driven Coty’s enormous returns in the first month and a half of 2019 – and what may continue to drive it later in the year…
The Company
For those who are unfamiliar, Coty is one of the world’s largest beauty and cosmetics manufacturers with $2.51 billion in revenue last quarter. It primarily makes and distributes fragrances and skin care products through its more than 70 different brands. Think of it as the Berkshire Hathaway Inc. (BRK.A, BRK.B) of consumer makeup and fashion, with a brand portfolio that includes CoverGirl, Tiffany & Co., Clairol, Lacoste, Rimmel, and more.
The Rally
Coty’s 68.3% rally can largely be attributed to the perfect storm of positive news stories, the first of which was the company’s stunning Q4 earnings report on Feb. 8.
The company reported earnings per share (EPS) of $0.24 on revenue of $2.51 billion for the October-December period. Those both surpassed analyst expectations of $0.22 and $2.47 billion, respectively, and pushed shares more than 32% higher on the day to $9.33, the highest close since Nov. 6, 2018.
Investors viewed the impressive financials as a return to form for the company that formerly suffered supply chain issues. CEO Pierre Laubies, who came on board in November and is largely seen as instrumental in the firm’s turnaround, mentioned on the earnings call that the company resolved most of those issues. He went on to say that “while we are confident we can return Coty to a path of growth, we are also realistic that it will take some time.”
The second news story responsible for lifting COTY stock came just a few days after the earnings release and relies on the fact that the company has long been seen as a ripe acquisition target. Coty’s vast and diverse business, combined with an inexpensive share price of $11, has made it desirable among larger firms, and one of those firms made a bid that investors seemed to love in spades.
On Feb. 12, German conglomerate JAB Holding Company announced a tender offer to buy up to 150 million shares at $11.65 each, valuing the stock at a 21% premium to the Feb. 11 closing price of $9.66. Once the offer goes through, JAB, known for owning food and coffee brands like Krispy Kreme and Keurig Dr. Pepper, would increase its stake in Coty from 40% to as much as 60%.
The news pushed the stock to even dizzier highs on Feb. 13, with that session’s 2.8% gain capping off an enormous one-week rally of 58%. Investors clearly responded positively to the deal’s implications, which include JAB deepening its nearly 30-year relationship with Coty. The timing of the deal seems fairly transparent on JAB’s part, as the conglomerate wanted to wait and see if Coty’s new CEO and $12.5 billion purchase of Procter & Gamble Co.’s (PG) beauty brands would positively impact the Q4 earnings.
Looking Ahead
Considering the news-based nature of the mid-February rally, it’s unlikely that Coty stock will continue its streak of explosive gains in the medium to long term. Any large share-purchase offer from a massive conglomerate is surely set to excite investors who have been skeptical of the consumer products sector, which is historically volatile due to its dependence on a variety of economic factors.
However, Coty should be a strong long-term investment since JAB seems to have the best interests of Coty’s business in mind. With the tender offer now deepening their decades-old relationship, investors can rest easy knowing that JAB will strengthen Coty’s brand portfolio.