In this article, let's take a look at The Estée Lauder Companies Inc. (EL, Financial), a $33.68 billion market cap company, which is one of the world's leading manufacturers and marketers of skin care, makeup and fragrance products.
Innovation
The company has a well-known brand with a broad range products and scale advantages. It operates with brands such as Clinique, Origins, M-A-C, Aveda, American Beauty and Ojon. The firm focuses on innovation, making investments and promoting its R&D. Further, costs savings by staff reductions or salary restrictions contribute to boost profitability.
Strong dollar
The company has a diversified revenue base according to more than $10 billion in annual sales and a network of more than 150 countries. With a strong dollar all over the world, international operations are facing exchange rate risk. We had said before that the firm had to take hedging strategy, but now we think it is mandatory to offset the effect of foreign currency rates.
Earnings surprises
The company posted earnings positive surprises over the past last quarters and with an average positive surprise of 18.5%.
| Earnings History | jun-14 | sep-14 | Dec 14 | mar-15 |
| EPS Estimate | 0.56 | 0.55 | 1.05 | 0.51 |
| EPS Actual | 0.66 | 0.59 | 1.13 | 0.72 |
| Difference | 0.10 | 0.04 | 0.08 | 0.21 |
| Surprise % | 17.90% | 7.30% | 7.60% | 41.20% |
Source: Yahoo! Finance
The company is expected to report its results on Aug. 17.
Ratings
Most analysts have a bullish opinion on it: 5 Hold Rating(s), 15 Buy Rating(s). When looking at the consensus price target, it stands at $92.33, according to MarketBeat, giving an 3.93% upside potential.
Revenues, margins and profitability
Looking at profitability, revenues increased by 1.20% and led earnings per share increased in the third quarter compared to the same quarter a year ago ($0.71 vs $0.54). Net income increased by 27.6% in the same comparison, rising to $272.10 million from $213.20 million.
The gross profit margin is currently very high, at 80.45% and the net margin is ranked higher than 83% of the 1,434 companies in the Global Household & Personal Products industry and is at 10.87%.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| EL | Estee Lauder | 31.45 |
| AVP | Avon Products | -81.42 |
| EPC | Edgewell Personal Care | 1.19 |
| Â | Industry Median | 6.70 |
The company has a current ROE of 31.45% which is higher than the one exhibit by Avon Products (AVP, Financial) and Edgewell Personal Care (EPC, Financial).
It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
| Quarter Ended | Dec12 | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 |
| ROE (%) | 58.35 | 22.69 | 11.60 | 34.95 | 46.35 | 22.63 | 27.41 | 23.90 | 45.87 | 28.37 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 28.74x, trading at a premium compared to an average of 21.3x for the industry. To use another metric, its price-to-book ratio of 8.71x indicates a premium versus the industry average of 1.57x while the price-to-sales ratio of 3.13x is above the industry average of 0.92x.
The P/B Ratio is close to a 10-year high of 9.25 and the P/S Ratio is close to a 10-year high of 3.19.
The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $30,395, which represents a 24.9% compound annual growth rate (CAGR).
Final comment
A rising population, higher spending levels and consumer preferences toward natural and organic products, constitute key drivers for the firm`s growth potential in the future. Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Ken Griffin was the largest shareholder of the company with 1,708,586 shares valued at $142.086 million at the end of the first quarter and the stake representing 0.15% of his portfolio.
Pioneer Investments (Trades, Portfolio) upped its stake 3.12% to 907,353 shares in the second quarter of 2015. On the other hand, Mario Gabelli (Trades, Portfolio) has decreased his position by almost 2% to 14,535 shares. More bearish was Manning & Napier Advisors, Inc. with a 50.39% decreased in the position to 36,620 shares.
Disclosure: Omar Venerio holds no position in any stocks mentioned
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