Summary:
Estée Lauder Companies Inc. (NYSE: EL) is a leading player in the global prestige beauty market, offering a diverse portfolio of brands across skincare, makeup, fragrance, and haircare. With a strong brand portfolio, robust digital and e-commerce growth, and expansion into emerging markets, Estée Lauder presents a compelling long-term investment opportunity.
Company Overview:
Estée Lauder Companies Inc., founded in 1946, is a multinational manufacturer and marketer of prestige skincare, makeup, fragrance, and haircare products. The company's portfolio comprises over 25 well-known brands, including Estée Lauder, Clinique, MAC, Bobbi Brown, Jo Malone, Aveda, and La Mer. With a presence in over 150 countries, Estée Lauder has established itself as a dominant player in the global beauty industry.
Investment Thesis:
We believe Estée Lauder is well-positioned for long-term growth due to the following factors:
Strong and diverse brand portfolio: Estée Lauder's broad range of iconic brands caters to various consumer needs and preferences, providing the company with multiple growth avenues.
Robust digital and e-commerce presence: Estée Lauder's significant investments in digital platforms and e-commerce have driven strong online sales growth and are expected to continue driving revenue in the future.
Expansion into emerging markets: Estée Lauder's ongoing efforts to penetrate high-growth emerging markets, such as China and India, are likely to contribute to revenue growth and market share gains.
Favorable industry trends: The global beauty industry is expected to grow, driven by increasing consumer demand for premium beauty products, the rise of the middle class in emerging markets, and a growing focus on self-care and wellness.
Industry Analysis:
The global beauty industry is projected to grow at a CAGR of around 5% over the next few years, reaching a market size of over $800 billion by 2025. This growth is driven by a combination of factors, including rising disposable incomes, increasing urbanization, growing consumer interest in premium beauty products, and a shift towards online channels for purchasing beauty products.
Competitive Advantage:
Estée Lauder has several competitive advantages, including:
Iconic brand portfolio: The company's strong brand recognition and reputation for quality enable it to command premium pricing and maintain customer loyalty.
Innovation and R&D capabilities: Estée Lauder's commitment to product innovation and research enables it to stay ahead of industry trends and consumer preferences.
Strategic acquisitions: The company has a track record of successful acquisitions, which have expanded its product offerings and geographical reach.
Efficient supply chain: Estée Lauder's well-established global supply chain ensures efficient product distribution and inventory management.
Valuation:
Price target
These past few years, earnings have been volatile due to Covid-related disruptions, so it's hard to place a reasonable forward multiple on next year's earnings. For example, EL's earnings dropped from $4.82/share in 2019 to $1.86/share in 2020 obviously due to the pandemic. Reaping the benefits of online retailing, as a result, earnings jumped to $7.79/share in 2021. However, this pull-forward of demand, together with the slow recovery of travel post-pandemic, analysts do not estimate earnings to return to 2021's levels until 2025.
If we look at the earnings picture from 2017 - 2017 using real and estimated earnings data, we calculated the Compound Annual Growth Rate to be 12.53% (this includes periods of significant earnings decline). The consensus is that earnings should trough this year, so if we calculate the CAGR from 2023 - 2027 using estimated earnings numbers we get 31.96%.
Our investing principle allows us to give the same forward P/E multiple as the growth rate. For example, if the company can grow its earnings 20%, we are willing to pay 20x next year's earnings. Given this analysis, we're willing to pay ~32x for EL's estimated earnings of $5.38 in 2024's Fiscal Year, which makes the price target to be $172/share. Looking out to 2025, the company is estimated to earn $7.08/share, applying a 32x multiple we can get $226.5/share.