Mediaboss Marketing

Estee Lauder (EL) owns a stable of well-known brands in the beauty care space: The eponymous skin care products, Clinique, Aveda, and Bobbi Brown are just a few of the premium brands that the company produces. These strong brand names enable the company to achieve high gross margins (~80%) and return on capital; ROIC has averaged over 20% during the last decade. In comparison, L'Oreal (OTCPK:LRLCY) has earned an average ROIC of less than 15% over the same period.

Estee Lauder has driven growth through innovation, acquisition, and new distribution channels. In 2016, the company reported spending $191 MM on research and obtained ~24% of global sales represented new products. Half of the company's R&D projects in 2016 were completed within a year, enabling the company to adapt rapidly to emerging trends. Recent acquisitions Too Faced and BECCA provided approximately half of the 8% y-o-y revenue growth in the most recent quarter. Estee Lauder revenues have averaged a growth rate of 5% over the last five years.

The company is investing in digital marketing and online sales to capitalize on the growing trend of internet retail. They are using a series of how to videos and tips from influencers in order to build the brand through online marketing. Estee Lauder's efforts have resulted in 2016 online sales that exceeded $1 billion, representing a 27% increase over the prior year.

The company markets products in makeup, skin care, hair care, and fragrances. Business in the Americas represented 42% of sales in 2016, while Asia Pacific represents 19%, and the balance being in Europe/Middle East/Africa. This geographic diversification has enabled the company to grow as more people enter the middle class; however, recent strengthening in the dollar has had a negative impact on revenues.

There are two share classes, with the class B shares having ten votes per share versus one vote per class A share. Class B shares can be converted to class A shares on a one to one basis. This share structure enables the Lauder family to exert significant control over the company without owning a majority of the company's shares. Dual class share structures are often not in favor of the retail investor, but in this case, it enables the family to focus on delivering long-term value to shareholders. Share based compensation led to a 1.7% reduction in diluted EPS relative to reported EPS in 2016.

Overall, Estee Lauder represents a well-run business that is able to command premium prices for their product. The company has a current ratio of 1.74 as of the most recent quarterly report. The shares are currently trading at $99, which is 30x 2016 free cash flow. Currently, analysts are estimating 2017 EPS of $3.40. Fiscal year 2017 earnings are scheduled to be released on August 18, so investors should be aware that there may be volatility in the company's shares in the next couple of weeks. Investors may be best served by holding off on purchasing shares in this quality company until there is a price correction.

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Estee Lauder - A Gorgeous Valuation - Seeking Alpha