The Estée Lauder Companies Inc. (EL, Financial) has been my favorite stock in the cosmetics sector for a while now. The company's combination of double-digit earnings increases over the past 10 years, shareholder equity growth and net margin expansion have proved to be valuable for shareholders. After rising 13% in the past year and near its 52-week highs, the stock is no longer as cheap as it was. Six months ago the stock was $80, and despite a brief period under $90 during the market downturn earlier this year, EL has stabilized in the past month. With the stock jumping 7% after strong February earnings, it looks like the stock can steadily climb higher with strong quarterly earnings performance.
EL's amazing jump of nearly 40% in the last three years can be attributed to a few different things: the company having bought over 4% of its shares outstanding over the last three years, an 11% increase in shareholder equity and a 14% increase in cash flow. Estee Lauder has continued to execute on all three metrics and the results show a strong, healthy 70-year-old company.
EL posted a 3% increase in sales in the second quarter. Estee Lauder has consistently added new brands to its lineups, such as Kilian, Dr. Jart+ and RODIN olio lusso. EL is raising sales growth estimates, most recently raising constant currency sales growth estimates to between 7% and 8%.
EL saw its net profit jump 7% in the last three years and its book value increase by 15%. Gross margins in the second quarter grew from 81.10% to 81.15%, compared to Revlon's 65.10% gross margin. Recent acquisitions are expected to add 50 bps to the company's total sales growth. EL is investing and acquiring cosmetics not just in the U.S. but internationally. In addition, higher gross margins, as well as increasing operating margins, are normal for Estee Lauder. In itss 2015 annual report, the company stated "We believe the best way to continue to increase stock-holder value is to provide our customers and consumers with superior products and services that they have come to expect from us in the most efficient and profitable manner while recognizing consumers' changing behaviors and shopping preferences."
The company has some of the best leadership I have seen. In its annual report the company stated "We maintain our leadership positions by finding "emerging markets" within our heritage markets, targeting growing trends in specific regions and tailoring our assortments to local demographics."
Operating expenses have also increased to 65.6%. Most of the increases were from "accelerated orders and brand and channel mix as certain retail and media formats carry different cost structures."
A significant driver of earnings growth over time for EL has been its share repurchase program, against which it bought $1 billion in shares in fiscal 2015. That is consistent with EL's repurchase activity as it has bought back large amounts of stock in 1998 (3.4% of shares outstanding), 2005 (1.2 million shares), and 2012 (10% of shares outstanding). In the last 10 years, the company has bought back at most 4.8% of its shares.
Even with the price increase, it still has room to grow. EL has never been very cheap the last 10 years, trading at a median P/E of 26, mainly because it is a mature company that continually increases value by buying back stock and growing their earnings. But at 26.95 times forward earnings, EL may not be a good value currently. This is a buy and hold stock when it is at the right price as earnings growth, acquisitions, and share buybacks will continually grow the company's value. With estimates of 11.70% earnings growth next year, Estee Lauder looks strong enough to surpass that number.
