1 Fashion Brand to Gloss Up Your Portfolio

You would be forgiven for dismissing Estée Lauder (NYSE:EL) as a stock that deserves a prized position in your portfolio. For many investors, Estée Lauder represents a company that features skin and hair products in flagship stores at malls across America but you might be surprised to discover this fashion firm has been growing its digital presence in leaps and bounds too.

It’s also a highly diversified company when it comes to product offerings and therefore revenue streams. Unsurprisingly, management has a very clear strategic focus, zooming in carefully on different demographics, whether it’s by age, wealth, psychographic or geography.

There is a lot to like about Estée Lauder stock, so let’s see what’s behind the gloss.

Estée Lauder Is Not Just 1 Company

The first clue that Estée Lauder is an empire comes from its name, which is officially The Estée Lauder Companies. That tell us there’s more to this fashion brand than meets the eye of the casual investors.

Indeed, under the corporate umbrella sits dozens of brands, including Estée Lauder, Clinique, M·A·C (Make-Up Art Cosmetics), Smashbox, Ermenegildo Zegna fragrances, Jo Malone London, and Tom Ford Beauty.

The combination of brands allows the firm to target not only skincare, for which it’s best known, but also fragrances and haircare.

Skincare is the largest segment and is dominated by the luxury product La Mer, or Crème de la Mer more precisely, as well as Estée Lauder. These products are aimed at the wealthier 35 and up age group.

M·A·C leads the firm’s makeup sales and is aimed more at make-up enthusiasts who predominantly fall into the 18-35 group. Famously among its users, M·A·C is not just a beauty enhancer but is known for high quality ingredients by purchasers who seek out high quality.

Clinique, on the other hand, drives revenues in both the skincare and makeup categories, and is aimed primarily at health conscious consumers who prefer products that have been dermatologically tested, so you’ll typically see hypoallergenic and fragrance-free offerings that are compatible with sensitive skin.

The business strategy of targeting different demographics and diversifying revenues across so many brands and categories has been a roaring success.

Estée Lauder Sales Are Massive

Beauty is big business, and Estée Lauder leads the pack with $15.9 billion in sales over the past fiscal year.

We can’t overlook the fact, however, that this represents a meaningful 10.3% decline year-over-year, though it does translate to a near 50% increase from a decade ago.

What’s more compelling than the top line figures is how well the company does in the key operating income line item on the profit-and-loss statement.

Over the past ten years, regardless of whether sales grew or fell, operating income has stayed positive and ranged from $1.6 billion to $3.4 billion, which it posted in FY 2022. That’s the kind of financial predictability that can comfort a long-term, conservative investor.

Another nugget of financial information that will appeal to investors looking for a place to park capital while sleeping at night is the firm’s rock solid balance sheet, which has a fortress $4 billion in cash and $1.45 billion in short-term investments. 

Offsetting the cash hoard is $10.3 billion in debt, but it’s not a number that necessarily should scare investors away, particularly those who are income-seeking. That’s because Estée Lauder pays out a 1.87% dividend yield, or $2.64 quarterly.

Ideally, we would like to see the payout ratio smaller than its present 91.95% because it starts to impinge on dividend sustainability above 100%.

Is Estée Lauder a Good Stock to Buy?

It’s hard to justify Estée Lauder as a steal on a valuation basis at this time given its trading at P/E multiple of 49.9x.

The year-over-year double digit percentage decline in sales is also concerning because it is indicative of consumers pocketbooks being tapped out. Perhaps of most concern, however, is the slide in net income backwards by 57% when the top line fell.

On the flipside, the company does have a rock solid balance sheet. Sure, the debt seems on the high side at $10 billion but the company has $23 billion in assets to more than offset that, as well as deep cash reserves.

For income-seekers, the dividend is good but not overly attractive, paying just under 2% and with a payout ratio near 100%.

Analysts are generally in agreement that the stock is undervalued, and the consensus rating is $184 per share, though the most optimistic analyst has a significantly higher price target of $225 per share. From where the EL share price sits today, upside of 31% exists to fair value if analysts, as a whole, are correct.

Wrap-Up

To address the fundamental question, is Estée Lauder stock undervalued? The intrinsic value of Estée Lauder is $184 per share, suggesting that the stock is undervalued by over 30%.

With that said, we would like to see a turnaround in top line revenues before making a big commitment to the stock. The top line decline has materially affected operating income and earnings per share. 

It’s no secret that Wall Street punishes stocks experiencing margin compression and declining profits. For Estée Lauder, that’s a real risk as macroeconomic factors come into play, such as higher interest rates affecting consumers purchasing products with credit cards.

Another key item that would make the stock more compelling is if operational costs could be reduced to allow the company squeeze out more margin and profits.

For now, the declining earnings per share and high earnings multiple make for a wait-and-see approach being the savvy play.

It seems the smart money has already submitted its vote, too, with EL share price falling 44% year-to-date. This is absolutely a great company, but one to put on a watchlist for the technical trend to turnaround and the multiples to compress before getting too eager on.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.