In this article, let's take a look at The Estée Lauder Companies Inc. (EL, Financial), a $27.71 billion market cap company that is one of the world's leading manufacturers and marketers of skin care, makeup and fragrance products.
Innovation
Although it is true that we are living in a slowing environment, Estée Lauder survives due to its well-known brand and also its scale advantages. The company has a 25% share of the prestige makeup market. It operates with brands such as Clinique, Origins, M-A-C, Aveda, American Beauty and Ojon. Further, the firm looks for innovation in order to remain in the top of the list. Other actions include costs savings by centralizing some functions while reducing some units. Some costs improvements focuses on reducing staff levels and salary restrictions. All these contribute to boost profitability. Finally, the cycle continues, the money saved is again reinvested in product innovation.
Geographic diversification
The company has a diversified revenue base according to more than $10 billion in annual sales and a network of more than 150 countries. The Americas accounted for 42% of sales (and 29% of profits in fiscal 2014). International operations accounted for the other 40%. Specifically, Europe, the Middle East and Africa 38% and Asia/Pacific the remaining 20%.
Not all are good news; these operations have the exchange rate as a major risk. So, Estée Lauder should be aware of this and try to implement some strategy to offset the effect of foreign currency rates.
Revenues, margins and profitability
Looking at profitability, revenues declined by 1.65% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.59 vs $0.76).
The gross profit margin is currently very high, at 83.43% and it has increased from the same quarter the previous year. The net margin is ranked higher than 88% of the 1,689 companies in the Household & Personal Products industry and is at 10.36%.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| EL | Estée Lauder Cos Inc | 30.15 |
| IG | IGI Inc. | 2.34 |
| AVP | Avon Products Inc | -12.73 |
| HLF | Herbalife Ltd | 732.58 |
| MED | Medifast Inc | 22.05 |
| Â | Industry Median | 8.70 |
The company has a current ROE of 30.15% which is higher than the one exhibited by IGI Inc. (IG, Financial), Avon Products (AVP, Financial) and Medifast Inc. (MED, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Herbalife (HLF, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 25.3x, trading at a premium compared to an average of 24.7x for the industry. To use another metric, its price-to-book ratio of 7.4x indicates a premium versus the industry average of 1.98x while the price-to-sales ratio of 2.6x is above the industry average of 1.98x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $32,296, which represents a 26.5% compound annual growth rate (CAGR).
Final comment
We think that a rising population, higher spending levels, and consumer preferences towards natural and organic products, constitute key drivers for the firm`s growth potential in the upcoming future. Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Signature Select Canadian Fund (Trades, Portfolio) and RS Investment Management (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
