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MarketScreener Homepage  >  Equities  >  Nyse  >  Estée Lauder Companies (The)    EL

ESTÉE LAUDER COMPANIES (THE)

(EL)
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Estée Lauder Companies (The) : A global platform, a well inspired series of acquisitions

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06/15/2019 | 04:21am EDT

The Estée Lauder group, a global leader in cosmetics and beauty products, is the latest investment in the MarketScreener USA portfolio.


The Estée Lauder brand is positioned in a prestigious segment of the industry, competes with the big names in the luxury business and has an excellent reputation. Its sales growth remains just like that of its peers largely driven by Asian (especially Chinese) demand. This compensates a certain stagnation in Europe and North America.

 

 

A bit like LVMH, already featured here, the group relies on a family shareholding structure - the Lauder heirs own 40% of the shares and control 87% of the voting rights. Thanks to its extraordinary scale, the company serves as a global platform for the marketing and distribution of the company’s various brands.

The group was introduced on the stock exchange by its heirs the same year that Estée Lauder decided to step back - or was asked to. The idea behind this IPO was to be able to finance the conquest of foreign markets and the company has had an exceptional track record since. This illustrates the quality of the business and of its growth rate. 

The share was listed at $6.50 in 1995 and now trades at almost $180; a spectacular increase in the shareholder family’s capital. On top of that there are regular and generous dividend payments.

Estée Lauder’s brand portfolio - assembled through major acquisitions -  is well diversified over all market segments: from the luxury segment (Estée Lauder, Frederic Malle, Rodin, Bobby Brown) to the more mainstream brands (M.A.C., DKNY), including ‘scientific’ brands (Clinique, La Mer, Lab Series) and designer brands (Tom Ford, Michael Kors, Tommy Hilfiger) launched via licensing agreements.

The group has been particularly active with acquisitions the last few years. Estée Lauder is one of the most sought-after clients for large investment banks - as are its peers of similar size. The latter are now searching for promising start-ups to renew their product offering and grow faster than their market. 

These acquisitions are currently even more strategic since the sales of the two historic brands Estée Lauder and Clinique - together amount for almost half of the group’s turnover - struggle to exceed the record levels they reached a few years ago.

The group’s recent performance was, therefore, more driven by acquisitions in the mainstream brand segment such as Jo Malone, La Mer and Smashbox. Although it’s difficult to measure exactly, we note that the profitability of these acquisitions remains satisfying over the long cycle.

For the record, the acquisition of M.A.C. between 1994 and 1998 turned out to be one of the group’s most inspired external growth operations. At the time, the acquisition was considered to be overpaid but it delivered an exceptional return on investment, especially since the company’s sales still continue to grow today

More generally speaking, the group’s strategy now consists of rejuvenating the image of the company that is prestigious but sometimes seen as a little outdated. Only three of the fifteen members of the Board of Directors are under the age of fifty, something that’s unusual in the cosmetics industry.

This is why Estée Lauder has made considerable investments to attract ‘millenium’ clients. A good example of this is the recent partnership with social media star Kendall Jenner. The good news is that, so far, this strategy seems to be paying of and even though it’s too soon to claim victory, this is an impressive performance.

In addition, the prestigious brands remain at the heart of the group’s efforts. This particular segment is less affected by economic cycles than the more generalist segments and also offers the possibility to generate (very) high margins.

On a financial level Estée Lauder distinguishes itself by its exceptional profitability - excluding acquisitions, the business require very little capital to operate - achieved despite the use of leverage that’s reduced to its simplest form. The debt level is negligible and the net debt is covered almost four times by the group’s annual operating income. 

Several analysts were sceptical about the amounts Estée Lauder spent to acquire new brands. The acquisition of Too Faced is a good example of this. The brand is very fashionable in North America and was bought at the end of 2016 for $1.45 billion while it was acquired for $500 million two years before by a private equity firm.

The group’s management, however, seems to have an undeniable talent for identifying high potential takeover targets. The sales of the two make up experts acquired in 2016 - Too Faced and Becca - are growing at an annual rate of 70%. We bet their previous owners didn’t have Estée Lauder’s global platform, nor the capacity to create the ‘synergies’ that stem from it…

On a result level, the group’s cash flows are easy to put in perspective with the accounting profits. The latter are mostly redistributed to the shareholders via dividends and - this is a characteristic of this file - share buybacks that have been maintained for five years.

The slight increase in debt has been used to finance the external growth operations: the group’s management won’t be accused of taking advantage of the unusually low cost of capital to raise debt on preferential terms and therefore reserves its cash flows to pay its shareholders.

The share buybacks are an optimal capital allocation when the shares are undervalued by the market. They can, however, be dangerous if they are allowed when the shares trade at high valuations. But the buybacks of the past years have been done at multiples between 25 and 40 times the profits.

There is reason for questioning though, unless the management is one step ahead and expects a bright future. This positive outlook could start this year: while the profit has stagnated at around $1.1 billion per year between 2013 and 2018, it is expected to grow significantly from 2019 to around $1.8 billion.

If these expectations turn out to be correct, the capital allocation should be more opportunistic than anticipated. In any case it will have served shareholders brilliantly lately, as the value of their investment has doubled in five years time despite a certain stagnation in the group’s results.

At this stage, the biggest risk for Estée Lauder would be a major recession in China and/or the announcement of tariffs on luxury products made by American companies as a retaliation in the ongoing trade war.

A fatal addiction to share buybacks could also make the Board of Directors lose touch with reality and continue to make unreasonable valuations stating that this has served shareholders well in recent years; a dangerous extrapolation, especially in the current market context.

The intrinsic quality of the group’s business, however, is indisputable and its financial position leaves enough room for the further consolidation of acquisitions. The analysts who follow the group have taken note of this and raised their earnings estimates hence triggering a favorables momentum that MarketScreener intends to benefit from.

(The author is not a shareholder.)

Neelie Verlinden
© MarketScreener.com 2019
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Size 2020e 2021e
Capitalization 70 283 M $ -
Entreprise Value (EV) 70 943 M $ 70 472 M $
Valuation 2020e 2021e
P/E ratio (Price / EPS) 33,2x 29,2x
Capitalization / Revenue 4,39x 4,11x
EV / Revenue 4,43x 4,15x
EV / EBITDA 20,2x 18,4x
Yield (DPS / Price) 0,95% 1,05%
Price to book (Price / BVPS) 14,4x 12,1x
Profitability 2020e 2021e
Operating Margin (EBIT / Sales) 18,3% 18,8%
Operating Leverage (Delta EBIT / Delta Sales) 1,62x 1,45x
Net Margin (Net Profit / Revenue) 13,5% 14,1%
ROA (Net Profit / Asset) 16,3% 17,0%
ROE (Net Profit / Equities) 45,2% 50,3%
Rate of Dividend 31,5% 30,7%
Balance Sheet Analysis 2020e 2021e
CAPEX / Sales   5,62% 5,20%
Cash Flow / Sales 16,9% 16,4%
Capital Intensity (Assets / Sales) 0,83x 0,83x
Financial Leverage (Net Debt / EBITDA) 0,19x 0,05x
Income Statement Evolution
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Sell
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Mean consensus OUTPERFORM
Number of Analysts 27
Average target price 210,92  $
Last Close Price 194,82  $
Spread / Highest target 23,2%
Spread / Average Target 8,26%
Spread / Lowest Target -15,8%
Consensus revision (last 18 months)