04 Oct 2017

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Estée Lauder (EL)

04 Oct 2017

In today’s content analysis, we are discussing The Estée Lauder Company (NYSE: EL) Download . The company, which is oriented towards manufacturing and marketing skin care, makeup, fragrance and hair care products for 29 Brands such as Bobbi Brown, Clinique, La Mer, M.A.C. and Origins, is on a solid growth path, which should continue for the upcoming years. Such growth is due to the company’s international expansion, growth made within the digital business, along with small but key acquisitions such as Too Faced and BECCA. Fabrizio Freda, current CEO of the company, described their portfolio strategy as ‘’growing existing brands and discovering new high-potential acquisitions that align with our values and offer a long-term outlook for success’’. It’s apparent, that the company knows how to leverage their global distribution, creative resources and operational expertise across all their brands.

Estée Lauder appears attractive for many reasons. The company has recently reported its strongest quarter since Q4 ‘14 with quarterly revenues growing over 9% YoY. This revenue increase is partly due to the efforts made by the company in the Asian markets, especially China where sales presented a 40% growth. It’s clear that the company is currently gaining momentum internationally. It has matured within the U.S. (1-YR revenue growth of 2.3%) and is now focused on expanding in Europe and Asia (1-YR revenue growth of 7% outside the U.S.).  Let’s not forget that this revenue growth would have been even higher with a weaker US dollar.

When looking at the intrinsic Value (IV) of the company, we can observe that Estee Lauder’s IV grew by 49% from June ‘16 to ’17 (from 41.8 to 62.37). On the other hand, the stock is trading at a premium; the P/IV ratio is at 1.74 which can seem high but is fairly in-line with other high quality/growth companies in the United States.

The Future Growth Value (FGV) of 54% also tells us that the stock is trading at a premium, compared to the current operating value. The reason for this could be that the market knows how big the potential is for Estée Lauder to keep growing, especially in Asia. The revenues from this geographical segment only represent about 20% of the total sales, but it also generates the highest growth rate.

The Economic Value Added (EVA) has also increased substantially since June ’15. On a trailing 12 months basis, the EVA has increased by 146% since then, thanks to a growing NOPAT, smart capital investments, and a lower cost of capital. The EVA now sits at an all-time high, around $923M.

In Summary:

– Estée Lauder is a geographically diversified leader in the beauty care and makeup industry

– Analysts expect a 43% earnings growth over the next 3 years.

– The Return on Equity is high and very stable, around 30%.

– The dividend yield is of 1.3%, and the company has raised the dividend at an annualized rate of 19% over the past 3 years.

– Dividend increases are supported by high free cash-flows and a conservative payout ratio of 39%.

– Smart acquisitions made recently by the company such as Too Faced and BECCA represent half of the 8% increase in the company’s revenue YoY.

– The company has high margins (no wonder when you look at the prices they charge for the products the company sells) and generates a high return on capital of 18% that are not expected to go down.

Estée Lauder is a well ran company, growing at above average rates despite the fear of increased competition in the market. It’s interesting to see how it’s still finding new ways to reach more customers and increase its market share and presence.

Blog post written by Diego Sanchez (intern), under supervision of Jean-Didier L.

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