The stock of The Estee Lauder (NYSE:EL, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $292.33 per share and the market cap of $106 billion, The Estee Lauder stock shows every sign of being significantly overvalued. GF Value for The Estee Lauder is shown in the chart below.
Because The Estee Lauder is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.1% over the past three years and is estimated to grow 6.76% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. The Estee Lauder has a cash-to-debt ratio of 0.69, which is in the middle range of the companies in the industry of Consumer Packaged Goods. GuruFocus ranks the overall financial strength of The Estee Lauder at 5 out of 10, which indicates that the financial strength of The Estee Lauder is fair. This is the debt and cash of The Estee Lauder over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. The Estee Lauder has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $14.2 billion and earnings of $2.49 a share. Its operating margin is 15.14%, which ranks better than 84% of the companies in the industry of Consumer Packaged Goods. Overall, the profitability of The Estee Lauder is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of The Estee Lauder over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of The Estee Lauder is 7.1%, which ranks better than 67% of the companies in the industry of Consumer Packaged Goods. The 3-year average EBITDA growth rate is -5.4%, which ranks worse than 69% of the companies in the industry of Consumer Packaged Goods.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, The Estee Lauder's return on invested capital is 15.34, and its cost of capital is 7.43. The historical ROIC vs WACC comparison of The Estee Lauder is shown below:
In summary, the stock of The Estee Lauder (NYSE:EL, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 69% of the companies in the industry of Consumer Packaged Goods. To learn more about The Estee Lauder stock, you can check out its 30-year Financials here.
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