Stock Picks With Chicks: Estee Lauder's Fresh Face

Gentlemen Fools: The next time the woman in your life gets a haircut, buys a new outfit, or tries out a new shade of lipstick, you might want to pay attention.

You see, for decades, investors have looked to ladies for signs about which way the economy was headed. During the Great Depression, skirt hemlines (and their proximity to our kneecaps) supposedly indicated how reserved the country felt about our financial means.

In the early 1990s, the tea leaves shifted, and cosmetics sales became the gauge for consumer sentiment. The so-called "Lipstick Indicator" was coined by Leonard Lauder, former chairman of Estee Lauder (NYSE: EL  ) , who noticed lipstick sales outpacing purchases of other nonessential items. The theory was that when our confidence waned, we opted for less expensive splurges to lift our spirits and help us through tough times.

While we appreciate Wall Street's acknowledgement of the power of female intuition, we're not pushovers for just any pretty-face-products manufacturer. (Just see what we said about Avon (NYSE: AVP  ) a few weeks ago.) We want a company whose good looks are more than skin deep. And in the cosmetics space, that company is Estee Lauder.

Estee Lauder has great bone structure
Don't be fooled by Estee Lauder's image as the Grand Dame of cosmetics. The company's much more than just its namesake brand.

Estee Lauder is the name behind a ton of hot, sought-after, sometimes-worshipped brands: Clinique, MAC, Bumble and bumble, Bobbi Brown, Aveda, Smashbox, and Origins, just to name a few.

Long before Smashbox's "Burlesque Style Kit" and FLIRT!'s "Glamourazzi Extreme Lip Lacquers," the Lauders were trendsetters in the beauty biz. Founded in 1946 by Estee and Joseph Lauder, the company was innovative from the start. One of its first ideas was to provide luxurious metal lipstick cases, when plastic containers were the industry standard. Another big first was the 1960s debut of Clinique, a dermatologist-tested brand that made women realize cosmetics could be good for their skin. The Lauders and their company also pioneered the "gift-with-purchase" concept, which has become an industry standard and a major draw for female shoppers.

Such industry "firsts" took the marketplace by storm, generating successful growth for the entire industry. Today, Estee Lauder's estimated to have 46% of the market share for prestige cosmetics.

Pretty is as pretty does
One of the reasons Estee is in so many places is that, unlike Avon, all of its lipsticks aren't placed in one basket. Methods of product distribution are important to savvy investors. When a company's got diversified distribution, all is not lost if one channel starts to falter with consumers. Estee Lauder's got this down; its brands are distributed through department stores, drugstores, the Internet, groovy cosmetic-centric stores like Sephora and Ulta (Nasdaq: ULTA  ) , spas and salons, and for some of its brands, stand-alone, mall-based stores.

If you were wondering how Estee Lauder stacks up against the competition, take a look at the chart below. The numbers illustrate its leadership role in the cosmetics industry.


Revenue Growth (TTM)

Earnings Growth (TTM)

Gross Profit Margin (TTM)

Debt-to-capital ratio

Estee Lauder 11% 71.7% 76.8% 36.6%
Avon 9.5% 9.7% 63.1% 66.7%
L'Oreal (OTC: LRLCY.PK) 4% 13.9% 71% 17.9%
Revlon (NYSE: REV  ) 0.9% (7.2%) 65.2% 528.8%

Source: Capital IQ, a unit of Standard & Poor's.

Estee is not a cheap date
It might shock you that Estee Lauder has a market cap of $15 billion. By comparison, much-watched stock Netflix has a market cap of just $9.9 billion; consumer-products giant behemoth Procter & Gamble's market cap is $174 billion. Clearly, though, Estee Lauder's no wallflower in the marketplace.

Meanwhile, because Estee Lauder's trading at about 30 times earnings – and currently near its 52-week high -- many investors will peg the stock as too pricey to add to their portfolios now. That knee-jerk reaction might cost them, though.

Remember that sometimes, beaten-down stocks are beaten down for a reason. Banking on elements that don't reflect fundamental strengths (like recent acquisition rumors, in the case of Avon) is not a sound long-term investing strategy.

Conversely, a seemingly "expensive" stock like Estee gets that way because of its fundamental strength. Often, superior companies that lead in their segments trade at higher multiples; Coach (NYSE: COH  ) didn't look like a traditionally "cheap" stock when Dayana recommended it for her 11 O'Clock Stock pick, but it's been on fire since then, posting great growth in its financial results.

As Dayana noted at the time, sometimes you might wait for a great markdown on a stock -- but it never materializes. Because of its history of fostering new ideas that expand the marketplace, a brand-rich industry leader like Estee Lauder is perfectly positioned to create even more growth that investors may never see coming.

More investing ideas from the Stock Picking Chicks:

Coach and Netflix are Motley Fool Stock Advisor selections. Procter & Gamble is a Motley Fool Income Investor choice. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax and Dayana Yochim do not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 09, 2010, at 12:45 PM, cattywampus wrote:

    Being a guy, maybe I shouldn't be the first one to post a comment, but hey! when has good sense ever stopped a guy from being a fool. Dayana, thanks for the COH pick, it still sits on the top of the list for the Nifty Fifty. Love the Stock Picks with Chicks. Alyce took your recent advice on ARO also.

  • Report this Comment On December 09, 2010, at 2:12 PM, XMFSchool wrote:

    Hey cattywampus -- There's no gender discrimination here! Stock Picks with Chicks is designed to be fun for the whole family -- guys, gals, kids, grownups and kidults alike!

    Glad you like the show -- and thank you for bringing up how kick-butt Coach has done since I recommended it in August. It's a great excuse for me to take yet another victory lap around the office. (Not that we measure investing success in mere months here at The Fool or anything... but still. ; ))



  • Report this Comment On December 09, 2010, at 2:39 PM, XMFVienna wrote:

    Hey pick chicks- I think you totally just justified a trip to the MAC counter when I hit the mall this weekend! And if my husband has anything to say about that, I'll send him here!

  • Report this Comment On December 10, 2010, at 9:47 PM, CMFStan8331 wrote:

    I would agree that it's a good company - that is a surprising market cap! Great brand identification, products that will almost certainly never go out of style, excellent gross margin and a desirable multi-path distribution chain. The China angle is definitely intriguing.

    However, the P/E isn't exactly low and the dividend statistics are not very impressive at all: a 1% yield, 7% 5-year growth rate and 21% payout ratio are not the sort of numbers to inspire great enthusiasm. A one-star CAPS rating does give some pause as well, although some gender bias might come into play there.

    The high P/E alone wouldn't bother me, but in combination with the uninspiring dividend stats it seems like there are better alternatives available. I will keep EL in mind - might be favorably disposed to jump on the bandwagon if it gets hammered at some point in the future.

  • Report this Comment On December 13, 2010, at 11:03 AM, XMFAloha wrote:

    Hi Dayana,

    Great work with the "Stock Picks With Chicks" series!

    It definitely has me rethinking the upside potential of some retail names that I've considered as potential buys for my Rising Star Portfolio.

    Keep in mind it pains me to say this as I'm still smarting as my second place "11 O'Clock" pick (VPRT - up 39%) is still being crushed by your first place Coach (COH - up 55%) call.

    Nice work!


    Andy L-C (TMFAloha)

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