Global makeup supplier Estee Lauder Companies (EL, Financial) is usually lumped in with the consumer packaged goods sector.
This is the group of stocks that have underperformed the market, losing up to 11% in value since the start of the year.
But, wait. Not so fast. Estee Lauder, unlike its global peers, has done a few things differently. It has changed the way it does business by changing where it does business. Once a member of the makeup counter at Macy’s Inc. (M, Financial), the makeup brand now sells in airports, retail pharmacies and online.
In fact, the New York City-based cosmetics company is considered a turnaround dynamo. Barron's Magazine recently named Estee Lauder CEO Fabrizio Freda among The World’s Best CEOs of 2018. Freda joined a list that included Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) Warren Buffett (Trades, Portfolio), Amazon’s (AMZN, Financial) Jeff Bezos and Alphabet’s (GOOGL, Financial) Larry Page.
According to Barron’s, “He invigorated the company with new brands, new markets and a fresh focus on millennials… Freda, a consumer products marketing whiz... also has acquired small, upstart brands that are disrupting the industry.”
Formula for success
GuruFocus' industry pages show Estee Lauder is fourth in market cap compared to industry leaders Procter & Gamble (PG, Financial), The Kraft Heinz Co. (KHC, Financial) and Mondelez International Inc. (MDLZ, Financial). With a market cap of $57.6 billion, the makeup and fragrance supplier has 6.8% of the industry.
Companies in the same sector, like Kraft Heinz and Kellogg (K, Financial), have experienced a decline in revenues as consumers have shifted preferences to healthier breakfast and snacking choices. Those companies are struggling to come up with new products that will draw customers back.
Estee Lauder, meanwhile, is having little difficulty drawing customers. A key to its performance has been a shift to sales in non-traditional venues, or what Barron’s terms as “high-margin” channels. After 2016, Estee Lauder started to beef up its website and venture into emerging markets, including China.
GuruFocus shows an operating margin of 17.37% is in the top 20% of an industry of more than 1,700 companies. The industry median is no more than 5.63%.
GuruFocus expects Estee Lauder’s earnings per share to rise 12.82% a year over the next three to five years. Forecasts show revenue of $13.8 billion in June. In a year, the forecast is for $14.6 billion. By June 2020, the revenue forecast is $15.65 billion.
The stock has soared 60% over the last 12 months. Year to date, it is up 23%. At market close on Monday, it stood just under $157 a share, down 0.62% on a day of market jitters over trade wars.
The median price-sales chart by GuruFocus shows it is trading above its historical market value.
It is trading at 51.16 times earnings, which is lower than 85% of more than 1,300 companies in the Global Household and Personal Products industry. The median is 20.69 times. It is also trading at 31.65 forward price-earnings, which is 81% lower than 194 of its peers in the same industry. The forward price-earnings median is 19.34.
World’s best CEO list
The formula for making Barron’s World’s Best CEOs list consisted of several key ingredients, among them revenue, earnings growth and share price performance over the past five years. Other important factors included innovation, transformation, growth, stamina, staying power, vision and leadership.
GuruFocus data can back up those metrics.
The company has a Piotroski F-Score of 5, which underscores a company with stable business operations.
It reports consistent revenue growth while its dividend yield is 0.95%. The dividend is lower than 77% of its peers in the Global Household and Personal Products Industry.
GuruFocus indicates it has an average annual earnings growth of 11.7% over the last decade. The number is 6.3% over the last five years and 22.9% over the last 12 months.
Revenue was reported at $13.2 billion over the trailing 12 months, compared to $10 billion in 2014. In net income, the company reported $1.15 billion in the trailing 12 months. It reported $3.3 billion in long-term debt and $1.9 billion in free cash flow.
GuruFocus identified only one severe warning sign. That is, the company’s assets are growing faster than its revenue growth.
GuruFocus business predictability ranking
GuruFocus has an important metric that credits companies delivering consistent profit growth and shareholder gains. More than 2,400 companies are vetted through this metric that is known as the business predictability ranking.
GuruFocus ranks the predictability of companies based on the consistency of their revenue per share and earnings before interest, taxes, depreciation and amortization over 10 years. The predictability rating also weighs in the business value that is reflected in the stock price over time.
Estee Lauder earned 4.5 out of five stars in the metric, which highlights those companies whose stock price shows an average gain of 10.6% a year.
Gurus who held shares of the stock in the first quarter included Robert Karr (Trades, Portfolio), Ron Baron (Trades, Portfolio), George Soros (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio), Spiros Segalas (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
