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)
|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.
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