What Is the Most Beautiful Investment of Them All?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone in the world wants to look beautiful. If they can’t look beautiful, then they at least want to feel beautiful. This has led to success for companies like Estee Lauder (NYSE: EL), International Flavors & Fragrances (NYSE: IFF), and Avon Products (NYSE: AVP).
These three companies might sell different products, but they all cater to the beauty-conscious consumer. As you might already know, the domestic market has matured. Demand will always be there to a certain extent, however. While demand has matured in the United States, it has increased in emerging markets where the number of middle-income consumers are growing at a rapid rate.
The question is, of course, which of the aforementioned companies is likely to present the best long-term investing opportunity?
High-end in many ways
Estee Lauder focuses on skin care, makeup, fragrances, and hair care. The company sells sprays, lotions, powders, creams, candles, soaps, and more. Estee Lauder is also a licensee for Tommy Hilfiger, Donna Karen New York, DKNY, Michael Kors, and more.
Estee Lauder has consistently improved its revenue and earnings annually. It sports a healthy net margin of 9.74%, its debt-to-equity ratio of 0.42 is stronger than the industry average of 0.7, and it yields 1.10%. The dividend appears to be very safe.
Estee Lauder is focused on selling its high-end brands in emerging markets. The most recent news on this front is its expansion plans in Africa, where it has seen success thus far. Unlike most of its peers, Estee Lauder has also seen increased sales in the United States and Europe. In the second quarter, sales in the United Sales increased 1%, while sales in Europe jumped 3%.
Estee Lauder sells more than 25 brands across 150+ countries. It ranks no. 33 on Barron’s 500 for 2013, and no. 279 on Forbes' Fortune 500 for 2013. Estee Lauder has been a long-term winner, and thanks to strong management it should be able to weather any economic storms relatively well. It shouldn’t be considered a defensive play, however.
International Flavors & Fragrances, or IFF, has been another long-term winner. Thanks to consistent innovation, this trend should continue. Since 2001, IFF has been granted 200 patents. It currently has over 170 scientists, 90 Ph.D.’s, and 320 application engineers on payroll. With this kind of brainpower, IFF should continue to launch high-quality products.
IFF’s revenue has consistently increased over the past three years. Earnings growth has been inconsistent, but the company always delivers profits. In the second quarter, net sales jumped 5% year over year. The company showed a revenue increase of 5% in Flavors and a revenue increase of 8% in Fragrances. Cash flow and margins continue to improve, and high-quality products allow for pricing power. Furthermore, raw material costs have declined, and the company has divested its non-performing assets.
Approximately 75% of IFF’s sales come from outside North America. Due to the current consumer weakness found throughout the majority of North America, this is a positive. The company's North American revenue did just increase 2%, but gains of 7% in Latin America and Asia are indicators of stronger demand in other areas.
A riskier idea
Unlike the two aforementioned companies, Avon saw revenue decline in 2012 and it swung to a loss. In the second quarter, North America revenue declined 12%, a drop that was mostly due to the company having fewer active reps. This might lead one to believe that Avon shouldn’t be considered as an investment choice.
While it’s certainly not recommended above Estee Lauder or IFF, Avon does have future potential thanks to its overseas growth. In the second quarter, for example, revenue in EMEA (Europe, Middle East, and Africa) increased 2%; this was mostly due to having more active reps in the region. Revenue also trickled higher by 1% in Latin America. That said, the United Kingdom, South Africa, and Asia-Pacific have been weak, with revenue declines of 5%, 11%, and 9%, respectively.
While Avon is seeing declining revenues in Beauty (4%) and Fashion (4%), it is seeing a 13% revenue increase in its Home segment. Other positives include lower freight costs, a higher gross margin, reduced ad expenses, and lower profit fees.
Avon currently yields 1.10%, but its debt-to-equity ratio of 2.56 is concerning. The company also sports a negative net margin of 1.06%.
Of the three companies mentioned, Avon is facing the most headwinds. While there is upside potential, better options exist. IFF is a highly innovative and well-managed company, positives that should lead to good long-term results. If forced to select the best investment option of the group, however, it would be Estee Lauder. This is thanks to its brand recognition, product and geographic diversification, quality debt management, and international expansion.
That said, it should be noted that none of these stocks should be looked at as defensive plays if you’re concerned about a market correction.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!