The Estee Lauder Companies: Is it a wonderful company that can be bought at a fair price?
Opdateret: 13. aug.
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 2022, Estee Lauder Companies dropped along with the rest of the stock market, and the decline has continued in 2023. In this analysis, I will investigate whether Estee Lauder Companies is a wonderful company that can be purchased at a fair price.
This is not a financial advice. I am not a financial advisor and I only do these posts 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.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Estee Lauder Companies. However, the company has been on my watchlist for a while due to its high gross profit and operating margins. I don't own any of their competitors either, but L'Oreal is also on my watch list. If you are interested in viewing the stocks I own or would like to copy my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Estee Lauder Companies, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.
Estee Lauder Companies is an American multinational manufacturer and marketer of skincare (56% of net sales in fiscal 2022), makeup (26% of net sales in fiscal 2022), fragrance (14% of net sales in fiscal 2022), and hair care (4% of net sales in fiscal 2022) products. The company sells its products all over the world. In fiscal year 2022, the Americas accounted for 26% of their net sales, Asia/Pacific accounted for 31% of their net sales, and Europe, the Middle East, and Africa accounted for 43% of their net sales. Estee Lauder Companies was founded in New York in 1946 and is known for a widerange of brands, including Estee Lauder, Origins, Jo Malone London, Clinique, and Bobbi Brown, among others. They currently own 27 brands. These brands are known all over the world, making 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 asCOO 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 who refuses to rest on his laurels and prefers to push forward to continue making unique accomplishmentsin 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 he didn't make the cut in 2022. However, he did make it to the 115th place in the CEO World Magazine rankings of the best CEOs in the world in 2022.He receives an 86 CEO ranking at Comparably, which places him in the top 5 % among CEOs in similar size companies, while he gets a 90 % approval rating across the organization at Glassdoor. Hence, it seems that he is well-liked among the employees as well. I believe that Fabrizio Freda has the credentials and experience to propel Estee Lauder Companies forward.
I believe that Estee Lauder Companies has a strong brand moat. I really like the management as well. Now let us investigate the 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 numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on invested 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. Estee Lauder Companies has delivered solidnumbers in all ten years except for 2020, which was during the pandemic and lockdowns. Once a company consistentlydelivers numbers above 10%, it piques my interest. I would be happy to invest in a company that manages to deliver a ROIC like this. If you looked at ROE instead of ROIC, the numbers would be even more impressive.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. While there have been some years where the equity has decreased, the numbers are still good.Usually, the decrease has had a reason such as a pandemic that has affected the growth. Thus, I find the numbers encouraging.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. It is not a surprise that free cash flow has been positive in all ten years. Levered free cash flow margin has been between 10% and 15% in most years,except for the earlier years and in 2021. Free cash flow yield was at its lowest in 10 years in fiscal 2022.
Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by current earnings. Doing the calculation on Estee Lauder Companies, the debt can be paid off in 2,15 years. It falls within the acceptable range of 3 years. Thus, I don't find that debt is any concern for the time being.
Based on my findings thus far, I believe that Estee Lauder Companies is a reputable company. However, no investment iswithout risk, and Estee Lauder Companies also has its share of risks. There are both short-term and long-term risks. One short-term risk is related to macroeconomics. Higher freight prices, increased prices on raw materials, and rising labor costs are all exerting pressure on margins, which decreased in fiscal year 2022 compared to fiscal year 2021. The gross profit margin decreased from 76,4% to 75,7%, while the operating margin decreased from 21,3% to 17,9%. Furthermore, the strong U.S. dollar is also impacting the results of Estee Lauder Companies, as more than 74% of their net sales comefrom outside of the U.S. Another short-term risk is the decrease in consumer spending in China. Estee Lauder Companies has significant exposure to China. One example is that their largest individual customer is a company that primarily sells products in China travel retail, accounting for 13% of their consolidated net sales in fiscal 2022. If Chinese consumers do not start spending their money, it will hurt the company in the short term. Especially because management, in their annual report in 2021,expected China to be a huge growth driver that would deliver double-digit growth year over year moving forward. A more long-term risk is competition. In their annual report for fiscal year 2022, Estee Lauder Companies state that there is significant competition in every market where their products are sold. Estee Lauder Companies lists competition as one of their largest risks moving forward, as the beauty business is highly competitive. They mention that some of their competitors have greater resources than they do. Hence, in some cases, they may be able to respond to changing business and economic conditions as quickly as their competitors.
There are also numerous reasons to invest in Estee Lauder Companies, as there is significant potential for business growth. The beauty industry will grow. The various markets in which Estee Lauder Companies operate are expected to grow. According to Globe Newswire, the global skincare market is expected to grow by 5,52% until 2028. The global makeup market is also projected to grow by 5% until 2028. Additionally, the global fragrance market is expected to experience a 5% growth until 2028, while the global hair care market is anticipated to grow by 6% until 2028. These numbers may not impress you, but Estee Lauder Companies has been able to consistently grow their market share since 2015. The company's growth in their markets, coupled with an increase in their market share, is expected to result in solid overall growth. Stimulus in China. China needs to increase domestic consumption in order to achieve their targeted 5% GDP growth.Thus, Chinese officials have been very vocal in introducing various stimuli to boost domestic consumption. If we see stimulus in China, it could boost consumption. Furthermore, we have seen travel numbers in China reaching pre-pandemic levels. As Estee Lauder Companies' largest individual customer primarily sells products in China travel retail, we might soon see improved results from Estee Lauder Companies in China. The Lipstick Effect. The lipstick effect is a theory that suggests during an economic crisis, consumers are more inclined to purchase affordable luxury goods. Researchers from Texas Christian University published a study in the Journal of Personality and Social Psychology, which found that there is a correlation between economic downturns and increased sales in the beauty industry, similar to the trend observed during the Great Depression. Thus, we might see Estee Lauder Companies outperforming companies in other industries during a prolonged recession.
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 6,55, which is the one from fiscal 2022. The estimated future EPS growth rate is 11% (as management expects it to be between 9% and 12%, and we chose the higher option). The estimated future PE is 22 (in this case, we multiply our predicted growth rate by two, as it is lower than the historical highest P/E). Additionally, we have already achieved the minimum acceptable return rate of 15%. Doing the calculations using the formula I described in "MY STRATEGY," we arrive at the sticker price (also known as fair value or intrinsic value) of $101,14. We want to have a margin of safety of 50%, we will divide it by 2. This means that we want to buy Estee Lauder Companies at a price of $50,57 (or lower, of course) 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 3.040. The capital expenditures were 1.040. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 728 for our further calculations. The tax provision was 628. We have 257,056 outstanding shares. Hence, the calculation will be as follows: (3.040 - 728 + 628) / 259,056 x 10 = $113,49 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With Estee Lauder Companies' Free Cash Flow Per Share at 5,60 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $73,72.
I believe that Estee Lauder Companies is a great company. They have a strong moat, great margins, and good management. They are facing some short-term challenges, which resulted in underwhelming numbers in fiscal 2022. Nonetheless, we see signs that China will introduce stimuli, while we may also see the dollar drop, which is good news for Estee Lauder Companies. I'm not too worried about competition because Estee Lauder Companies has a large moatthat should protect them from competitors. The market in which they are operating is growing, and they are gainingmarket share, which bodes well for future growth. You may not be able to purchase Estee Lauder Companies at a 50% discount to its intrinsic value at any time, but I aim to acquire it below intrinsic value in at least two out of three calculations. Estee Lauder would become intriguing at the intrinsic value of the Payback Time price, which is $147,44.
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