The Beauty Sector: Morgan Stanley Turns Bullish On Estee Lauder, Coty

Investors may want to take advantage of recent pullbacks in two beauty names, Estee Lauder Companies Inc EL and Coty Inc COTY, according to Morgan Stanley.

The Analyst

Morgan Stanley's Dara Mohsenian upgraded Estee Lauder from Equal-weight to Overweight with a price target bumped from $159 to $160.

The analyst upgraded Coty from Equal-weight to Overweight with a price target lowered from $17 to $14.50.

Estee Lauder: 4 Headwinds Ease, 2 Tailwinds Emerge

The bullish case for the beauty company's stock comes as four prior concerns have either been resolved or priced in after the pullback, Mohsenian said in the upgrade note.

They include: 

• A slowdown in China that's now more priced into the stock.
• Expectations for management's below-consensus 2019 guidance have played out.
• Estee Lauder's management indicated during the fourth-quarter conference call that ad claim issues won't be material.
• A strong macroeconomic backdrop supports discretionary companies like Estee Lauder.

The elimination or easing of multiple headwinds is coupled with two factors that further support a bullish stance on the stock, Mohsenian said.

The company's focus on high-growth channels and higher-margin channels implies a continued favorable shift in the business, the analyst said.

Estee Lauder is a pure play on the prestige beauty category, which has been growing at a faster rate than the lower-end mass products in eight of the past nine years, Mohsenian said. 

Related Link: Despite Competitive Pressures, Estee Lauder Is Set For Margin Expansion, DA Davidson Says In Upgrade

Coty: 'More Conservative' Price Target Offers Upside

Coty was viewed in recent years as being "disadvantageously positioned" within the fast-growing beauty market, while its $12.5-billion acquisition of 43 beauty brands from Procter & Gamble Co PG was riskier than the market assumed, Mohsenian said in the upgrade note.

Yet Coty's stock has fallen around 65 percent since its all-time high in June 2015, which offers investors a compelling opportunity, the analyst said. 

The case for turning bullish on Coty's stock after years of underperformance is fourfold, Mohsenian said.

They include:

• A path toward stability in top-line growth.
• Upside to the Street's EBIT estimates for 2019 and 2020.
• The company could benefit from an increased JAB stake, which would be seen as a "sentiment driver."
• The stock is trading at the very low end of its consumer packaged peers at just 13.3 times 2020 estimated P/E, 9.9 times EV/EBITDA and with a 9.2-percent free cash flow yield.

Morgan Stanley's "more conservative" $14.50 price target offers investors a compelling potential 25-percent upside, including dividends, and marks the first time the research firm is taking a bullish stance on the stock since Coty's 2013 initial public offering.

Price Action

Estee Lauder shares were trading higher by nearly 1 percent at $139.57 at the time of publication Tuesday, while Coty shares were up 6.5 percent at $12.93. 

Related Link: 6 Reasons Why Coty Is No Longer A Buy At BMO