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The 3 Best Beauty Product Companies to Buy in 2017

By Bradley Seth McNew - Apr 1, 2017 at 8:17AM

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The industry itself faces some challenges, but these three companies could be an attractive portfolio addition.

The beauty industry has experienced robust growth in recent years, all in spite of the fact that it faces many of the same competitive market pressures and challenges as the broader retail industry. To wit: much of the growth in this industry is concentrated in a few forward-looking companies, while those that haven't kept up are increasingly losing ground to e-commerce giants and budget brands. Here are some of the best beauty-product companies investors can buy in 2017. 

e.l.f. Beauty

e.l.f. Beauty Inc. (ELF -0.70%) is a relatively young brand -- as is the stock, having held it's IPO in September 2016-- but it's already proving its appeal in the marketplace, especially among younger consumers.  The company has a unique take on social-media marketing, including a program called the "Beauty Scape influencer program" that uses on-site events and over 190,000 "Beauty Squad members." The tech-savvy brand showed off this tactic at the recent South by Southwest conference, exhibiting it as a way for consumers to watch an augmented-reality live stream of a beauty network. 

Shares of e.l.f. Beauty are down around 8% so far this year, even after receiving a nice bump in early March after the company reported 2016 earnings that were better than analysts were expecting. It should be noted that these same results included a 20% year-over-year sales increase. The stock is now about flat since going public. One especially attractive highlight of the company's operations is that gross margins went from 52% to 58% in the recent fourth quarter, year over year, so e.l.f.'s bottom line should expand nicely in the coming years if it can continue to hold on to this extremely high profit margin and control spending, while still gaining market share and growing sales. Shares certainly aren't cheap, trading at 49 times forward earnings estimates, but if the company can manage to reach or beat average analyst earnings expectations of $0.49 per share for the current year, the stock could get a lift as the market rewards its long-term growth potential. 

A woman leaning out of a parked car, showing off Estee Lauder lipstick.

Image source: Estee Lauder.

Estee Lauder

Then there's the behemoth in the market, the company with a name that's almost synonymous with beauty products. It's also the parent company of America's top two favorite brands, MAC and Clinique, according to a recent consumer survey by Market Force. The Estee Lauder Companies (EL 0.78%) own 29 brands in total, from upscale to mass market, and boasts more than 70 years in business. In addition to its makeup brands, Estee Lauder also owns lines of skin-care, fragrance, and hair-care products. 

In the company's fiscal 2017 Q2, ended Dec. 31, it reported sales up 3% year over year, but it expects that figure to accelerate to 5% for the full fiscal year, or 7% on a constant currency basis. All the better, management said it expects 2017 constant currency earnings-per-share growth of 8% to 9% over fiscal 2016. One of the reasons for the growth is the addition of the brand Too Faced, acquired in November, which seems to have been a smart buy for the company. Another reason for the growth is the company's success in Asia, where sales rose 5% year over year during the quarter. The region still makes up only about a fifth of total sales, which looks like an opportunity for Estee Lauder to increase its footprint there. 

Estee Lauder certainly faces many of the same challenges as its peers, such as the decline of department store traffic that have historically been a strong distribution point for beauty products. However, the company's brands seem to be finding success with its products selling well within what is arguably the most important makeup retailer now -- and subsequently the next company on this list: Ulta Salon, Cosmetics, and Fragrance (ULTA -2.35%)

An Ulta storefront.

Image source: Ulta Salons.

Ulta Salons

During Ulta Salon's own recent earnings call, management announced that it had struck a deal with none other than Estee Lauder to begin selling its MAC brand in-store and online starting during Q2, a deal that should be good for both companies. What's remarkable about Ulta is that while many retailers are struggling to find enough traffic to keep same-store sales growing, Ulta's comps rose an impressive 15.8% in fiscal 2016 year over year. Much of its success in this area seems to be a focus on in-store salon services and product demos. The company also launched the Ulta Beauty credit card program in 2016.   

The company has also done well growing its online presence. Ulta.com sales grew 56% in 2016 and now makes up around 10% of total revenues -- an encouraging sign that the brand can thrive in the world of e-commerce. One way Ulta.com is growing quickly is Ulta's loyalty program, which gives members points for purchases and access to exclusive deals via its mobile app. The loyalty program grew 28% in 2016 to over 23 million members.

Ulta has upped its guidance for how many physical locations it expects and now anticipates growing from the nearly 1,000 stores it currently has to as many as 1,700 in the coming years, with about 100 new stores planned for 2017. Ulta stock has performed very well recently, nearly doubling in just the past two years alone, but it could have plenty of room to run from here as the company continues to expand its store count while maintaining growth in Ulta.com.

As with Estee Lauder and e.l.f. Beauty, shares aren't exactly 'cheap' following each stock's recent rise, but each company's successes speak for themselves. For venturesome investors that believe in paying up for quality, they continue to look like three of the best companies to buy in the beauty-products space. 

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Stocks Mentioned

Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
ULTA
$343.05 (-2.35%) $-8.26
The Estee Lauder Companies Inc. Stock Quote
The Estee Lauder Companies Inc.
EL
$237.21 (0.78%) $1.83
e.l.f. Beauty Stock Quote
e.l.f. Beauty
ELF
$21.25 (-0.70%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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