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The Estee Lauder Companies: Is it a wonderful company that can be bought at a fair price?

Opdateret: 10. jan.


A famous quote by Warren Buffett is: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Estee Lauder Companies is considered a wonderful company. However, Estee Lauder Companies had a challenging year in fiscal 2023 as revenue and profits decreased. As a result of the poor performance, the stock has plummeted. Does it present a buying opportunity, or is it better to remain on the sidelines?

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 (52% of net sales in fiscal 2023), makeup (28% of net sales in fiscal 2023), fragrance (16% of net sales in fiscal 2023), and hair care (4% of net sales in fiscal 2023) products. Estee Lauder Companies was founded in New York in 1946 and is renowned for its extensive portfolio of brands, which includes Estee Lauder, Origins, Jo Malone London, Clinique, and Bobbi Brown, among others. They currently own 27 brands. These brands are known worldwide, making it easy to determine that Estee Lauder Companies has a significant brand moat. The company sells its products in 150 different countries worldwide. They sell their products through their website, their 1.600 freestanding stores, and through third-party retailers. In fiscal year 2023, the Americas accounted for 28% of their net sales, Asia/Pacific accounted for 33% of their net sales, and Europe, the Middle East, and Africa accounted for 39% of their net sales.


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, including 10 years in the health and beauty division. He graduated in Economics and Business Administration from the University of Naples. He is recognized as a leader who is strategically focused, financially disciplined, and results-oriented. He does not settle for past achievements but instead strives to make new and unique accomplishments in the business world. Under his leadership, Estee Lauder Companies has demonstrated multiple sources of growth and achieved 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 did not 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 received an 86 CEO ranking at Comparably, which places him in the top 5% among CEOs in similar-sized companies, while he achieved 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 too. Now, let us examine the numbers to determine if Estee Lauder Companies meets our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history, with all years showing numbers above 10%. Estee Lauder Companies has consistently delivered solid financial results over the past ten years, with the exception of 2020, which was impacted by the global pandemic and subsequent lockdowns. Additionally, 2023 has proven to be a particularly challenging year for Estee Lauder Companies. I'm not worried about seeing a low ROIC in 2020 as it was due to the pandemic. It is slightly concerning to see a significant decrease in ROIC in 2023. However, there is a reason for that, which I will explain later in the analysis. I would like to see a higher number moving forward though.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. While there have been some years in which the equity has decreased, the overall numbers are still good. It is also nice to see that despite the challenges faced in 2023, they still managed to increase their equity to the second highest level in the past ten years. The only year that surpassed this was 2021, which was fueled by stimulus money.



Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its 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 margins to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising that free cash flow has been positive in all ten years. If we exclude 2023, the numbers have mostly been encouraging, as both free cash flow and levered free cash flow margin have consistently been high. However, 2023 is concerning because Estee Lauder Companies delivered the lowest free cash flow and levered free cash flow margin in the past ten years. Thus, it would be nice to see higher numbers in 2024.



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. The calculation on Estee Lauder Companies shows that the debt can be paid off in 7,07 years. It is much higher than I would like it to be. However, there are reasons for that. The first reason is that Estee Lauder Companies delivered low earnings, and the other reason is that they purchased Tom Ford. Management has been very clear about prioritizing debt repayment, which is why they have temporarily halted their share buyback program. Thus, the high debt will not keep me from investing in Estee Lauder Companies.



Based on my findings thus far, I believe that Estee Lauder Companies is a reputable company. However, no investment is without risk, and Estee Lauder Companies also has its share of risks. One risk is an economic downturn. The general level of consumer spending is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, and consumer confidence generally, all of which are beyond Estee Lauder Companies' control. Consumer purchases of discretionary items tend to decline during recessionary periods when disposable income is lower, which may impact sales of these products. Thus, if we observe a slowdown in the global economy, it could negatively impact Estee Lauder. The China Risk. China still had extensive travel restrictions during half of Estee Lauder Companies' fiscal year 2023. As a result, their global travel retail business decreased by 34% in fiscal year 2023, primarily due to the decline in Asia travel retail. The challenges in China's travel retail disproportionately pressures skincare, which is Estee Lauder Companies' highest margin category, and while China has opened up for travel, the travel retail sales are still under pressure. Furthermore, China has decided to crackdown on "Daigou". Daigou refers to someone outside of China who purchases goods on behalf of someone living in China. Thus, Daigou sellers have been buying Estee Lauder products in Hainan's duty free shop to sell them at a lower price in China. The crackdown on "Daigou" means that this no longer happens in a large scale. A more long-term risk is competition. In their annual report for fiscal year 2023, 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 its largest risks moving forward, as the beauty industry is highly competitive. Some of their largest competitors are L'Oreal, Moët Hennessy Louis Vuitton, Proctor & Gamble, and Unilever. However, we also see new competitors such as e.l.f. Beauty is a growing company that continues to gain market shares every year.


There are also numerous reasons to invest in Estee Lauder Companies, as there is significant potential for business growth. The beauty industry will continue to 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 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 its market share since 2015. The company's growth in its markets, coupled with an increase in its market share, is expected to result in solid overall growth. Margin Recovery. Fiscal 2023 was a challenging year for Estee Lauder Companies, which negatively impacted margins. However, management has been very vocal about their margin recovery. Management expects to deliver an annual margin expansion that is faster than their pre-pandemic historical average. One example is that they expect the operating margin to expand by 60-110 basis points in 2024, reaching somewhere between 12% and 12,5%. And in the long term, management believes they can reach a 20% operating margin, which would significantly boost profitability. The Lipstick Effect. The lipstick effect is a theory that suggests that 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.



Now it is time to calculate the price of shares in Estee Lauder Companies. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,65 which is the target set by management for fiscal year 2024. They expect the EPS to fall within the range of 3,50 to 3,75. I have selected a projected future EPS growth rate of 8% (management expects to grow between 4% and 12% per year). Additionally, I have chosen a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on the fact that Estee Lauder Companies has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $31,17. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Estee Lauder Companies at a price of $15,39 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% per year. Estee Lauder had higher capital expenditures than operating cash flow in fiscal 2023. Therefore, I am unable to perform the calculations for fiscal year 2023. However, I believe that 2023 was an outlier. Hence, I am sharing the numbers from fiscal 2022 here: The operating cash flow last year was 3.040. The capital expenditures were 1.040. I tried to review their annual report to determine the portion of the capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated 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 in 2022.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Estee Lauder Companies' Free Cash Flow Per Share at $2,04 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $23,43.


I believe that Estee Lauder Companies is a good company. They have a strong moat, good profit margins. The EsteeLauder Companies faced challenges in fiscal year 2023 due to COVID restrictions in China. Furthermore, we have witnessed a crackdown on "Daigou," which has exacerbated the situation. I believe that these are short-term challenges as we observe the resurgence of travel in China, and Chinese consumers will eventually purchase Estee Lauder products through other channels. Management has been vocal about not being concerned about sales in China in the long run, stating that the current situation is only a matter of timing. Competition will always be a factor, but I'm not overly concerned about it due to the strong brands that Estee Lauder Companies have. If Estee Lauder Companies manage to expand margins at a faster pace than their pre-pandemic historical average, they could rapidly return to being highly profitable again. I bought shares in Estée Lauder several times when the stock price dropped below $145 and continued to decline. However, I later sold my shares at break-even because I was discouraged by the latest earnings call. I do not plan to buy shares in Estée Lauder anytime soon, but I will keep the company on my watch list.-


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