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The Estee Lauder Companies is a wonderful company but is it time to buy?

Opdateret: 3. maj


A famous Warren Buffett quote is: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price". In this analysis I will investigate Estee Lauder Companies and try to determine if it can be bought at a fair price.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


Estee Lauder Companies has long been on my watchlist. I first got interested when I saw their large gross profit margin and decided to look further into the company. Furthermore, I like the industry, as I believe it is an industry that can perform well in all kinds of economic environments. For full disclosure, I should mention that I have never earned shares in Estee Lauder Companies.


Estee Lauder Companies is an American multinational manufacturer and marketer of skincare (58 % of net sales in 2021), makeup (26 % of net sales in 2021), fragrance (12 % of net sales in 2021) and hair care (4 % of net sales in 2021) products. It was founded in New York in 1946 and is known for a broad range of brands such as Estee Lauder, Origins, Jo Malone London, Clinique, and Tom Ford Beauty, just to mention a few of their 27 brands. These brands are known all over the world and makes it very easy to determine that Estee Lauder Companies has a large brand moat.


Their CEO is Fabrizio Freda. He became CEO of Estee Lauder Companies in in 2009, after joining the company as COO and president in 2008. Prior to joining Estee Lauder Companies, he spent a couple of decades at Procter & Gamble, where he held various positions, among those 10 years in the health and beauty division. He graduated in economic & business administration from the University of Naples. He is known as a strategically focused, financially disciplined, and results-oriented leader that refuses to rest on his laurels and prefers to push forward to continue to make unique accomplishes in the business world. Under his leadership Estee Lauder Companies has shown multiple engines of growth and delivered record sales. Besides being the CEO and on the board of Estee Lauder Companies, he also serves at the Board of Directors of BlackRock Inc. He has previously been on Barron's list of the world's best CEOs but didn't make the cut in 2021. I believe that Fabrizio Freda has the credentials and experience to move Estee Lauder Companies forward.

I believe that Estee Lauder Companies has a very strong brand moat. I really do like the management as well. Now let us investigate the big five numbers to see if Estee Lauder Companies does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.


The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all benchmarks. These numbers are exactly what you would like to see. A great ROIC well above the 10 % requirements in all the benchmark. This is one of the reasons I called Estee Lauder Companies a wonderful company in the headline.



The next numbers we will investigate are the Sales Growth Rates. As we can see the Sales Growth Rate is well above 10 %. It is not exactly what we would like to see, as the numbers are a bit underwhelming. Obviously, one would like to see higher numbers, but these numbers are also far from alarming.



The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. These numbers are fantastic, and you see the company is continuing their growth. I wouldn't but too much emphasize in the last numbers though, as Estee Lauder Companies report according to the financial calendar, meaning that the numbers you see in the last benchmark is right after the pandemic. Hence, the enormous growth.



The Equity Growth Rate is the most important of the four growth rates. Once again Estee Lauder Companies delivers numbers that investors would be very happy to see. Well above the 10 % requirement in all benchmarks, and once again, I wouldn't put too much importance in the latest benchmark.



Finally, we investigate the Cash Growth Rates. Once again, the numbers are above the 10 % requirement in all benchmarks. Even when not giving too much importance to the latest benchmark, these numbers are great, and should make you happy if you are already invested in Estee Lauder Companies or excited if you are considering investing in it.



To shortly summarize the five numbers from Estee Lauder Companies. Pretty much all numbers are fantastic, and ROIC, the EPS growth rate, the equity growth rate and the cash growth rate are all well above the requirements in all the benchmarks. You do not often see such great numbers when looking at companies. The sales growth rate might be a bit underwhelming but if you are combining all the historic numbers, I believe there are no doubt that Estee Lauder Companies has continuously delivered year after the year. Looking at the historic numbers alone, I would feel very comfortable in investing in Estee Lauder Companies.


Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Estee Lauder Companies, the debt can be paid off in 1,93 years. This is very acceptable and yet another reason why Estee Lauder Companies is an interesting company.


Before I calculate a price I want to pay for Estee Lauder Companies, I will look into potential growth and risks.


While none of the markets that Estee Lauder Companies operate in is expected to grow by double digits in the next couple of years skincare expected 5,2 % CAGR, makeup expected 5,3 % CAGR, fragrance expected 3,9 % CAGR and hair care 5,6 % CAGR, Estee Lauder Companies still expects their EPS to grow by 9 % to 12 %. To accomplish long-term growth, Estee Lauder Companies has put two programs in place: Leading Beauty Forward and Post-COVID Business Acceleration Program. In short, the Leading Beauty Forward programs is to build on their strengths and leverage their cost structure to free resources to investing in their continue growth. While the Post-COVID Business Acceleration Program is a two-year program designed to help improve their efficiency and effectiveness and by accelerating the shift to online sales. Furthermore, they expect continuously double-digit growth from China, while the post -pandemic world will help shift the momentum in their makeup section and international travel will recover their travel retails business, which has historically been one of their fastest growth areas.


As with all other companies Estee Lauder Companies also faces some risks. The most obvious ones are the Covid-19 pandemic and competition. While people around the world is getting vaccinated, we are still seeing lockdowns in parts of the world due to the pandemic. If this continues, it will affect Estee Lauder. The beauty business is highly competitive, and if Estee Lauder Companies are unable to compete effectively, it would hurt their financials. However, Estee Lauder Companies has a very strong brand moat, and they also have a very high profit margin, which is higher than many competitors. While there are a lot of other risks mentioned in their annual report, I believe that these risks are the most obvious risks right now.



All right, we have gone through the numbers, potential and risk regarding Estee Lauder Companies, and now it is time for us to calculate a price for Estee Lauder Companies. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I have decided to use an EPS of 7, which is a bit lower than the current one but still quite higher than we have seen previously. Estimated future EPS growth rate of 10,5 (As management expects it to be between 9 and 12 %), Estimated future PE 21 (in this case we multiply our predicted growth rate with two, as this is lower than the historical highest P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $98,62, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Estee Lauder Companies at price of $49,31(or lower obviously), if we use the Margin of Safety price.


Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 3.631. The Capital Expenditures was 637. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 445,9 in our further calculations. The Tax Provision was 456. We have 233,05 outstanding shares. Hence, the calculation will be like this: (3.631 - 445,9 + 456) / 233,05 x 10 = $156,24 in TEN CAP price.


The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 8.45 and a growth rate of 10,5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $108,74.


I believe that Estee Lauder Companies is a great company. They have a strong moat, great gross profit margins and a good management. They have a clear strategy on how to grow their business, and a post-pandemic world will do good for a company such as Estee Lauder Companies. Unfortunately, the company seems too expensive for the time being. I would love to buy Estee Lauder Companies at my highest calculated buy price, being the TEN CAP price at $156,24. However, it seems unlikely that the company will fall to that price. I will continue to monitor the company and make new calculations every year. Hopefully, I will be able to add the company to my portfolio at some point.


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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


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