A $25 Billion Cap Stock To Put A Smile On Your Face

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

Estee Lauder (NYSE: EL) recently released earnings, which were welcomed by investors and managed to push the stock to new highs, only for prices to subsequently consolidate into its prior price range just below $64. In this state, the stock is likely off the radar of many, but this is also great time to be looking at it from an investment stand point.

What's to Like?

While a slowdown in the global growth of the beauty product sector had an overall impact, pockets of strength exist. Emerging markets have been the star in the portfolio; sales there were up 24% for the quarter and accounted for 40% of its total business.  China was the largest emerging market; sales were up 28% and helped garner larger market share in the country.  Interestingly, the company sells more (value wise) to Chinese people out of China than within. The Chinese market runs at between 7 and 8 million women (mostly). The Asia/Pacific region has achieved compound sales growth of 15% over the past 5 years, with net sales of $2 billion in 2012.  In addition, North American sales of luxury brands, like Jo Malone, were up 20%, with sales in top-end department stores beating out mid-tier store sales. The company opened 42 new M-A-C stores, of which its flagship Fifth Avenue store has surpassed its Times Square store. U.K. sales were robust for Jo Malone and M-A-C brands.  In France, brand growth of its skin care and makeup categories outpaced its competitors.

The Figures

The company reported EPS of $1.13 compared to $1 from a year ago.  The company typically edges analyst estimates, but for Q2 it came in solidly ahead, which was another reason for optimism. The company affirmed top line local currency growth of 6%-7% for full fiscal year.  The full year earnings per share forecast was increased to between $2.51 and $2.59.

The Competitors

Avon Products (NYSE: AVP) pulled a rabbit out of its hat as it recently reported a better than expected fourth quarter, beating estimates by $0.10 to come in at $0.37.  This popped the share price to new highs, with 30 million+ shares traded (over four times average volume).  But the earnings beat came at the expense of a 1% drop in revenue, which makes it tough to sustain a consistent level of earnings growth.

As with Estee Lauder, it was emerging markets that did the heavy lifting;  Avon's Brazilian sales were up 10%, and Russian sales were up 3%. However, China is a big miss for Avon. A mixed retail message hurt performance in a region that has seen stellar sales for Estee Lauder.  Distribution woes turned Russia into a problem child for Estee Lauder, and perhaps gave Avon an easier ride in the country.  But this could quickly change, particularly as Russians tend to favour the luxury end of the scale.  Avon announced it was existing the Korean and Vietnam markets to save money.  Again, Korea was a problem for Estee Lauder with falling sales.  But Estee Lauder remained committed to Korea, and were "cautiously optimistic" on a rebound.  Given the Avon experience, Korea will likely be a chronic drag on the company, so it may end up that Estee Lauder will follow Avon out the exit door.  

L'Oreal (NASDAQOTH: LRLCY) has a current P/E comparable to Estee Lauder at around 25.  Again, emerging markets were the stars. For the first time, emerging markets earned more money than western Europe or North America.  Profits grew 17% to €2.9 billion on a 10% rise in sales.  The Asia-Pacific region contributed €4.3 billion in sales. And like Estee Lauder, its luxury product segment exhibited strong sales growth. L'Oreal's results effectively confirmed the importance of the emerging market, particularly in driving future revenue growth.

Procter & Gamble (NYSE: PG) has experienced a strong advance in 2013, moving from $67 up into the high $70's.  While not a pure beauty product play, it does offer products that compete in the Estee Lauder space.  Procter & Gamble's beauty and grooming segment saw flat volumes, but "positive organic sales."  The beauty sector saw 3% growth over the prior 3 years (compared to 4% in the grooming division), with growth in 11 of the last 12 quarters. There has also been new product launches at the value and premium end of the spectrum (Vidal Sassoon Pro and Pantene Expert).  It is also seeing  results which were "at or above expectations" in its cosmetics division (COVERGIRL).  Procter & Gamble is looking towards its new product innovations to grow sales "one to two points ahead of the market growth rate."

Summary

Estee Lauder is perhaps the most attractive of the stocks featured.  Estee Lauder holds a competitive edge over Avon in key emerging markets, China in particular. In addition, Avon Products also has two more ticks against it: a negative Profit Margin (-0.40%), and a bribery investigation from the Justice Department and SEC. L'Oreal and Estee Lauder are very similar in their performance and fundamental valuations, though L'Oreal edges Estee Lauder on profit margins. And L'Oreal pays more of a dividend, but Estee Lauder is more consistent in its dividend payments (the last L'Oreal dividend payment was in April 2012). In Procter & Gamble's favor is its diversified product range, but it is relying on new products to offset the slowing growth in its existing product range (at least in the beauty sector).  While trading at a lower P/E to Estee Lauder, Procter & Gamble's projected earnings are flat. And given the recent sharp advance in price, it may not be the bargain it could otherwise be.

Estee Lauder is well placed to benefit from sector rotation out of speculative stocks into more defensive plays.  The stock hasn't pushed itself to the front of the field, offering itself at an attractive price relative to its peers.  This is a stock that adds the fundamental product line to beautify your portfolio.


fallond has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. 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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