Shares of Coty (COTY) are on the rise after Morgan Stanley analyst Dara Mohsenian upgraded the stock to Overweight as he now sees scope for topline stabilization and synergy-led margin progression to drive above-consensus earnings. This comes a week after his peer at BMO Capital downgraded the stock to Market Perform on "downside risk" to Coty's 2019 earnings per share outlook. Earlier this month, Bank of America Merrill Lynch analyst Olivia Tong had also cut her rating on the shares to Underperform from Buy, citing inconsistent execution and increasing disruption across the mass beauty segment. MORGAN STANLEY SAYS BUY COTY: In a research note this morning, Morgan Stanley's Mohsenian upgraded Coty to Overweight from Equal Weight, while lowering his price target on the shares to $14.50 from $17. Following recent sell-side downgrades and the stock's 40% year-to-date decline, Mohsenian now sees the risk/reward as "compelling." The analyst argued that Coty can return to steady topline growth going forward, and said he sees upside to adjusted consensus EBIT in 2019 and 2020. Furthermore, the prospects of an increased JAB stake post the two-year lock-up restriction could be a potential favorable catalyst or sentiment driver, he contended. Overall, Mohsenian acknowledged that he has historically been unconvinced about Coty's long-term organic growth outlook, but now he believes the market has turned too bearish, placing too much focus on weak U.S./European Consumer Beauty results and not enough attention on strong Luxury/Professional performance. BMO, BOFA/MERRILL CUT RATING: Last week, BMO Capital analyst Shannon Coyne downgraded Coty to Market Perform from Outperform and lowered her price target to $12 from $18, saying she sees "downside risk" to the company's FY19 EPS outlook. The analyst told investors that she believes it will be difficult in the near-term to discern between underlying fundamentals and supply chain execution, limiting multiple expansion. Nonetheless, Coyne noted that the Luxury and Professional businesses continue to outperform, synergies remain on target, and she believes in management's long-term strategy. More bearish on the stock, Bank of America Merrill Lynch analyst Olivia Tong double downgraded Coty to Underperform from Buy and lowered her price target to $10 from $16, citing inconsistent execution and increasing disruption across the mass beauty segment. Tong argued that Coty is now more exposed to the mass beauty market following its merger with 41 brands from PG Beauty (PG) and is seeing disruption from smaller, niche brands and newer distribution channels. The analyst believes brand relaunches will not be sufficient to offset overall industry trends, and Coty's high leverage could keep it from deploying capital for M&A, buybacks, or dividends. WHAT'S NOTABLE: This morning, Morgan Stanley's Mohsenian also upgraded Estee Lauder (EL) to Overweight from Equal Weight as he believes the stock's sharp pullback since mid-June has created a compelling entry point. The analyst told investors he believes the market is undervaluing the company's growth potential with its favorable exposure to high growth channels within the high growth prestige beauty category. Risk associated with a China slowdown now appears to be priced in and the below-consensus initial 2019 EPS guidance has already played out, he contended. The analyst also believes that strong U.S. macro data has reduced the risk of the market shifting to a more defensive posture away from more discretionary names such as Estee Lauder. PRICE ACTION: In morning trading, shares of Coty have jumped over 6% to $12.90.
