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Sangara Narayanan
Sangara Narayanan
Articles (562) 

Estee Lauder Is Looking Beautiful

A great opportunity awaits, but the timing is critical

December 14, 2017 | About:

Estee Lauder (NYSE:EL) is a cosmetics giant with operations across 150 countries. As a niche consumer goods manufacturer, Estee Lauder’s revenue stream remains highly stable, and looks promising for the future as well. The company brought in $11.8 billion in annual sales last year, and sales grew by 9% during the most recent quarter.

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Sales have grown at a steady pace over the last five years, pushing the stock price to surge by more than 50% in the last one year alone. According to the company, the global prestige beauty market is expected to grow at a CAGR of 5% over the next five years, and there is still enough room for the company to grow in global markets.

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As big consumer goods companies and pharmaceutical majors around the world struggle under their own weight, what used to be considered as extremely defensive and safe stocks for investors are not so safe anymore. And that is what makes a company like Estee Lauder a safe bet for the long term. Though there are several players in the beauty segment, only Estee Lauder and L'Oreal have global recognition and, therefore, greater chances of growth.

Though there is no moat around the business when you look at it from the segment point of view, as anyone can launch a perfume or a skin care product that captures market share, the possibility of achieving brand recognition and earning the trust of millions of customers all over the world would be a very difficult prospect for a new player.

Due to the size and scale of the companies, Estee Lauder or L’Oreal would quickly move in to buy anyone who shows promising growth, further strengthening their respective product portfolios. Estee Lauder in no stranger to acquisitions. The company has bought several companies over the last 10 years and will continue to do so in the future. The company had just $3.38 billion debt on its balance sheet, while its cash position was $1.44 billion. This financial strength will allow them to make bolt-on acquisitions whenever opportunities arise.

With market conditions remaining favorable and the balance sheet looking extremely strong, the prospect for short- to medium-term growth looks good. The only problem with Estee Lauder is the surging stock. The stock is trading at 33 time earnings and nearly 4 times sales, which clearly shows that a lot of the future growth potential is already priced into the stock.

Investors should keep the company in their watchlist and add it when there is a correction. The stock has been zooming upward for the past year, and could be due for a correction as soon as a weak quarter hits. That’s the time to jump in with both feet.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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