​Estee Lauder: Makeup Money

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We are raising our rating on Estee Lauder Companies (EL) to buy from hold and setting a target price of $125, says John Staszak, editor of Argus Research.

Estee Lauder manufactures and markets skin care, makeup, fragrance and hair care products. The company’s products are sold in over 150 countries and territories under a range of brand names, including Estee Lauder, Aramis, Clinique, Origins, M.A.C., Bobbi Brown, La Mer, and Aveda.

Estee Lauder also licenses fragrances and cosmetics under the brand names Tommy Hilfiger, Donna Karan, Michael Kors, and Coach.

The company sells its products through more than 30,000 retail locations, including upscale department stores, specialty retailers, high-end perfumeries, pharmacies, and salons and spas.

The company continues to benefit from strong demand for high-end beauty products, and about one-third of its brands are posting double-digit revenue growth.

We also like its mix of retail stores, e-commerce and “travel retail” sales at major airports, and its efforts to invest in developing the business.

We believe that Estee Lauder can reach its targets of 6%-8% local-currency revenue growth and double-digit earnings growth over the next three years.

On August 18, Estee Lauder reported fiscal 4th quarter 2017 earnings of $0.51 per share, up from $0.42 in the prior-year period and above the consensus estimate of $0.43.



In the 1st quarter of 2018, the company projects 9%-10% revenue growth and earnings of $0.94-$0.97 per share.

Management expects fiscal year 2018 revenue to grow 8%-9% on a reported basis and 7%-8% in constant currency. It projects full year EPS of $3.87-$3.94. The consensus EPS estimate prior to the release was $3.77. Management often issues conservative guidance, which it then surpasses.

Reflecting management’s guidance and the company’s history of positive earnings surprises, we are raising our Fiscal Year 2018 EPS estimate from $3.80 to $4.01. For fiscal year 2019, we are setting an estimate of $4.42.

Our long-term earnings growth rate forecast remains 14%. The company has also steadily raised its dividend, which currently yields about 1.3%.

In our view, EL shares are favorably valued at 26.6-times our revised fiscal year 2018 EPS estimate, below the five-year average of 31.0. We believe that Estee Lauder’s above-peer-average growth rate, strong return on equity, and demonstrated record of cost cutting justify a higher multiple.

Our $125 target implies a multiple of 31.2-times our revised fiscal year 2018 earnings estimate, and a potential total return of 19% including the dividend. We are also raising our long-term rating to buy.

John Staszak is editor of Argus Research.

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