Beauty Is Big Business for These Companies

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Making people look good is a big business. In fact, in 2012, the cosmetics industry was worth $68.7 billion in the U.S. and $433.4 billion overseas. Sales forecasts show annual growth of 3% to 5% over the next five years and, by 2017, are expected to reach $81.7 billion in the U.S. and $562.9 billion worldwide. The success of the cosmetics and personal care sector in emerging markets has supported profits, while Europe lingers in a recession and the U.S. continues its slow economic growth.

Innovation is creating new products that are selling well and contributing to growth. For example, cosmeceuticals, products that combine cosmetics and pharmaceuticals, is a fast growing niche that generated about $30.5 billion in 2011, and is expected to grow 8% between 2012 and 2016. There are also opportunities to capitalize on the aging of the U.S. population, of which, by 2020, two-thirds will be 55 and older. Also, by 2020, 40% of the U.S. population will consist of women that are multicultural and mixed-race, creating the need for products that cater to different skin tones and hair textures. Demand for natural, plant-based and/or organic products is also creating entirely new product lines.

Three companies looking to capitalize on expanding consumer demand for cosmetics are Nu Skin Enterprises (NYSE: NUS), Estee Lauder (NYSE: EL), and Avon Products (NYSE: AVP).

Nu Skin Enterprises has a major new product on the way

Nu Skin Enterprises has a network of more than 850,000 independent distributors and customers that market and sell the company’s premium personal care, nutrition, and technology products. In 2012, 78% of the company’s $2.1 billion in revenue originated in China and Asia. In the first quarter of 2013, net income was $54 million, up 12.5% from $48 million in the first quarter of last year. EPS was $0.90, up 28.6% from $0.70 in the first quarter of 2012. Nu Skin’s revenue in China grew 141% in the quarter.

Nu Skin revised its 2013 guidance, and now expects between $2.83 billion and $2.86 billion in revenue and EPS between $4.85 and $5.00. When the company reports second-quarter results on Aug. 1, it will discuss the introduction of its new ageLOC TR90 weight management system, considered the biggest product introduction in the company’s history and expected to net $380 million to $400 million in sales during the second half of 2013. Wall Street estimates five-year growth for Nu Skin of 20% and 2014 EPS to grow to $5.61.

Estee Lauder expects broad-based growth

In its latest quarterly results, Estee Lauder reported a 2% increase in net sales of $2.29 billion. Operating margin increased 130 basis points and net earnings increased 19% to $177.8 million. Diluted EPS also rose to $0.45. The percentage increases exclude adjustments for restructuring activities recorded in the third quarters of 2012 and 2013.

The company expects to deliver solid sales in fiscal 2013. Full year sales growth is estimated at 6% and EPS before charges should range between $2.56 and $2.61. Estee Lauder's overall business is expected to continue to do well with some negative impact due to economic weakness continuing in Southern Europe and Korea. Shares currently trade at a forward P/E of 22.68 and appear overvalued with a PEG ratio of 1.83. Estimated EPS for 2014 is $2.94, and growth over the next five years is estimated to be 13%.

Avon focused on cost reduction

Avon’s first quarter results show adjusted net income of $112 million, or $0.26 per share, and a net loss of $13 million, or ($0.03) per share. Constant dollar revenue growth was up in its Latin America, Europe, Middle East, and Africa regions due to increases in average orders and/or an increase in active sales representatives. However, North America and Asia Pacific had revenue declines of 15% and 10%, respectively. Avon was also negatively impacted by foreign currency devaluations and restructuring expenses.

Operating margin in all regions, except North America, rose mostly due to lower costs and expenses. The stock’s current price is fairly valued with a PEG ratio of 0.83 and a forward P/E of 16.82. Next year’s EPS is estimated at $1.38 and a 23% growth is expected over the next five years.

My Foolish conclusion

Nu Skin Enterprises looks like good value with good growth prospects. However, the current slowdown in China’s economy could have a negative impact on the company's results. Investors should look for signs of falling sales when the company reports second-quarter results next month. Estee Lauder, while overvalued, may provide more stable performance over the long-term.

Avon is currently trying to dig itself out of a hole, with an underperforming North American segment and high debt levels (debt to equity is extremely high at 304). While S&P has a negative outlook on the stock, there’s positive market sentiment that Avon will continue to de-leverage and stabilize its margins.

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Eileen Rojas 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!

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