Estee Lauder (EL -1.08%), one of the world's largest cosmetic-related stocks, is up 12.5% over the past month thanks to solid earnings reported at the end of the year. Despite a weakening economy and trade concerns with China, Estee Lauder is riding high in a volatile market. This could be an attractive time for investors to buy.
A rising stock price is nothing new for Estee Lauder; shares are up 49% since January, even as the overall market has slumped because of the ongoing trade war between China and the U.S.
Beauty and politics
Trade wars and tariff concerns have brought trouble to Estee Lauder across several different countries in which it operates. Protests in Hong Kong translated into lowered sales, and the company has shut stores there due to the chaos. This has dampened Estee Lauder's top-line, as 70% of its sales come from outside North America (specifically the Asia-Pacific region and Europe, the Middle East, and Africa). Sales have also been affected in the U.K. because of reduced consumer confidence ahead of Brexit. Finally, the retail environment is currently tough in North America, and the company aims to stabilize sales there in the coming quarters.
Management factored increasing trade barriers into their projections of sales growth for the next year; duties are already in place in Europe, and Estee Lauder is likely to face high costs for ingredients shipped to the U.S. from China. (About a third of Estee Lauder's products sold in China come from the U.S.; the rest are produced in Canada and Europe.) Keeping the expected headwinds in mind, sales are expected to grow by 8% this fiscal year, to $16 billion. The company has managed to insulate itself from political trouble by establishing a strong foothold in emerging countries in the Middle East, Asia/Pacific, North Africa, and sub-Saharan Africa. These countries offer untapped potential and a long growth runway to Estee Lauder.
The Estee Lauder name is linked to both luxury and quality. The company has a global license for many big brands and a strong presence in each market segment in the industry. With more than 25 brands in 150 countries, its portfolio consists of such well-known names as MAC and Jo Malone London.
Sales expansions were mainly thanks to corporate innovation and product quality. Three of Estee Lauder's four largest brands showed significant increases, and numerous growth engines meant good results despite challenges in key markets. Analysts have projected earnings per share of $5.80 for the year.
There's been strong growth in the online business thanks to the implementation of new digital experiences, including high-touch mobile services, online booking for stores, and loyalty programs. Further, management remains highly focused on widening its global presence with new stores, recently launching Jo Malone at Tmall in China and five ASOS locations in the U.K.
Strategic buyouts are another key catalyst that has strengthened the company's portfolio recently. Estee Lauder's investments in fast-growing, multi-brand beauty company Deceim should be good for sales, as should the acquisitions of Le Labo and Editions de Parfums Frédéric Malle, which have helped attract a loyal customer base.
Estee Lauder's focus on the travel retail business has paid off thanks to a surge in traffic in duty-free stores in airports where it sells products, effective marketing strategies, and a unique product range. Strong fundamentals plus growing numbers of airline passengers should translate into further growth in travel retail, and Estee Lauder has advantages over other beauty companies thanks to better customer insights and an excellent digital marketing strategy. Its biggest global competitors include Ulta Beauty and Avon Products.
What it means for investors
When a company is able to generate revenue and increase profit even in trying times, it is likely here to stay. Management expects sales to increase by 10% in 2020 -- 2 percentage points higher than the current figure, despite the uncertain macroeconomic environment. And Estee Lauder has consistently beaten earnings estimates over the past few years.
Net sales of $14.8 billion in 2019 included its four major revenue streams:
- Skin care: comprised 44% of net sales and grossed $6.6 billion in 2019
- Makeup: comprised 39% of net sales and grossed $5.9 billion in 2019
- Fragrances: comprised 12% of net sales and grossed $1.8 billion in 2019
- Hair care: comprised 4% of net sales and grossed $0.6 billion in 2019
Net earnings were 12% in 2019 compared with 8.1% in 2018, an increase of 4.91%. Also, the company's dividend of $609 million in 2019 was significantly higher than the previous year's. Further, Estee Lauder has an EBITDA margin of 20.9%, making it a highly profitable business. The value of a stock will ultimately be determined by the cash flow available to the company's management. Estee Lauder has free cash flow per share of 1.27.
The stock price should go even higher in the coming quarters, and I expect it to be a winner during any coming economic upswing, with a risk/reward profile that's much more attractive than its price suggests. Even if economic growth does not rebound anytime soon, this stock will perform well over the mid- and long term. An attractive business model and striking valuation should give investors appealing returns.