Estee Lauder (NYSE: EL) is an established giant in the beauty industry with multiple compelling traits. These characteristics have made investors fall in love with the stock, but Estee Lauder appears to be overpriced, even if it performs better than investors currently expect. Don’t let its beauty fool you into buying overpriced stocks. I am neutral about Estee Lauder.
4 Reasons Investors Love Overpriced Estee Lauder Stock
Before evaluating the stock’s valuation, it’s important to understand why investors have a certain love for Estée Lauder stock and are willing to pay a hefty premium. It’s not a single reason, it’s a powerful bundle of multiple attributes.
1. Large and growing market
First of all, the beauty industry is already quite large and mature, but it continues to grow steadily. For context, in 2015, the global beauty industry (which includes cosmetics, fragrances, personal care and skin care) made her $458 billion in revenue. It will generate about $529 billion in revenue in 2021 and from 2023 to 2027 he is expected to grow at his CAGR of 3.8%. The trend is driven by Estée Lauder (OTC: LRLCY).
2. Strong brand awareness and customer loyalty
Another driver that explains why investors want to be part of the Estée Lauder success story is its strong brand reputation and strong customer base. The company’s brand portfolio includes well-known brands such as M.A.C, Bobbi Brown, Jo Malone London, Darphin, Editions de His Parfums Frederic Malle, and others, loved by millions of consumers around the world. It has been.
Beauty products generate repeat sales, so strong brand awareness and customer loyalty can result in consistent cash flow for your company. Consumers are also willing to pay a premium for well-known brands. This also allows the company to charge above-average prices and achieve excellent profit margins compared to its competitors.
3. Recession-resistant cash flow
In addition, investors are willing to pay premium valuations for stocks because the beauty industry is relatively recession-proof. Grooming and self-care are considered essential to some degree these days, so people continue to spend money on grooming and self-care even during economic downturns.
As a result, Estee Lauder’s earnings may be less impacted in such scenarios. This was demonstrated in both the global financial crisis and his COVID-19 pandemic. In 2009, Estee Lauder’s revenue fell 7.6% to $7.3 billion from his $7.9 billion in 2008. By 2011, revenue already had him in excess of $8.8 billion. Additionally, his 2020 earnings were down 3.8% year-on-year to just $14.3 billion due to the pandemic. After that, in 2021 and 2022, the company continued to achieve sustained top-line records, generating revenue of $16.2 billion and $17.7 billion respectively.
4. Evidence of Revenue and Profit Growth Performance
Finally, Estée Lauder has established a proven track record of growth over the years as demonstrated by its rapid resurgence and sustained sales record as seen in the example above. The company has increased its revenue at a compound annual growth rate (CAGR) of 6.2% over the past decade. Impressively, revenue growth has accelerated further recently, reaching a CAGR of 8.5% for his five-year revenue.
Estée Lauder has grown organically as well as through acquisitions. For example, last November, the company announced that it would acquire luxury brand Tom Ford for his $2.8 billion.
Additionally, as mentioned earlier, the beauty industry, especially Estée Lauder, enjoys high profit margins due to its premium pricing capabilities. Net profit growth has significantly outpaced revenue growth as the brand has achieved economies of scale over time. Compared to the above metrics, net income grew at a CAGR of 10.8% over the past decade, but earnings per share increased to 11.7 from 2012 to 2012 due to a decrease in share count due to share buybacks during this period. increased at a CAGR of %. 2022.
Are EL Stocks a Buy, According to Analysts?
Turning to Wall Street, Estée Lauder has a moderate buy consensus rating based on 16 buys, 5 holds and 1 sale allocated over the past three months. The stock is probably outperforming it, despite analysts’ favorable assessment. Estée Lauder’s average stock price forecast is $257.94, suggesting a 0.6% decline.
Bottom Line – Valuation Matters
Investors’ love for Estée Lauder is unquestionably justified, and it has several monumental and compelling features. This favor for the stock is reflected in the fact that the stock has increased by more than 300% over the past decade and he has increased by 104% over the past five years.
Nonetheless, the stock’s gains have outpaced Estee Lauder’s financial growth. As mentioned above, despite the company’s rapid growth in revenue and profit, the company’s revenue and net profit have increased by only 63.8% and 134%, respectively, over the past decade. The stock is therefore undergoing a large valuation expansion. In fact, the stock is currently trading at 46.7x futures P/E, a far cry from the 20x-25x “normal” futures P/E it used to be.
As such, the stock could face significant valuation headwinds even if it significantly beats the current consensus growth forecast, which calls for earnings per share growth of about 7% annually over the next five years. Are stocks worth the premium? Yes, but nowhere near this ridiculous size. Therefore, be cautious about holding Estée Lauder stock near current levels.