Here's Why We Think Coty (NYSE:COTY) Is Well Worth Watching

Stock Analysis

It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' A loss-making company is yet to prove itself with profit, and eventually the inflow of external capital may dry up.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like Coty (NYSE:COTY). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

View our latest analysis for Coty

In business, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS) performance. Which is why EPS growth is looked upon so favourably. It is awe-striking that Coty's EPS went from US$0.068 to US$0.58 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company.

It's often helpful to take a look at earnings before interest and tax (EBIT) margins, as well as revenue growth, to get another take on the quality of the company's growth. Coty shareholders can take confidence from the fact that EBIT margins are up from 6.4% to 9.8%, and revenue is growing. Ticking those two boxes is a good sign of growth, in our book.

You can take a look at the company's revenue and earnings growth trend, in the chart below. For finer detail, click on the image.

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. While crystal balls don't exist, you can check our visualization of consensus analyst forecasts for Coty's future EPS 100% free.

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

The real kicker here is that Coty insiders spent a staggering US$2.4m on acquiring shares in just one year, without single share being sold in the meantime. The shareholders within the general public should find themselves expectant and certainly hopeful, that this large outlay signals prescient optimism for the business. We also note that it was the Independent Director, Olivier C. Goudet, who made the biggest single acquisition, paying US$1.5m for shares at about US$7.56 each.

On top of the insider buying, it's good to see that Coty insiders have a valuable investment in the business. Indeed, they have a considerable amount of wealth invested in it, currently valued at US$434m. Investors will appreciate management having this amount of skin in the game as it shows their commitment to the company's future.

While insiders are apparently happy to hold and accumulate shares, that is just part of the big picture. That's because Coty's CEO, Sue Nabi, is paid at a relatively modest level when compared to other CEOs for companies of this size. The median total compensation for CEOs of companies similar in size to Coty, with market caps over US$8.0b, is around US$12m.

The Coty CEO received total compensation of just US$3.6m in the year to June 2022. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.

Coty's earnings have taken off in quite an impressive fashion. What's more, insiders own a significant stake in the company and have been buying more shares. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Coty deserves timely attention. We should say that we've discovered 3 warning signs for Coty (2 are a bit unpleasant!) that you should be aware of before investing here.

The good news is that Coty is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

What are the risks and opportunities for Coty?

NYSE:COTY

Coty

Coty Inc., together with its subsidiaries, manufactures, markets, distributes, and sells beauty products worldwide.Show more

Rewards

Trading at 18.2% below our estimate of its fair value

Earnings grew by 791.9% over the past year

Risks

Earnings are forecast to decline by an average of 13% per year for the next 3 years

Interest payments are not well covered by earnings

Large one-off items impacting financial results

Share Price

Market Cap

1Y Return

Further research onCoty

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Coty Inc., together with its subsidiaries, manufactures, markets, distributes, and sells beauty products worldwide.

Proven track record and fair value.