Saturday 16 November 2019

There's style and substance in this big beast of global cosmetics world

An attractive propect

'Beauty, as mentioned earlier, is never, ever unfashionable even when it is priced as a luxury.' (stock photo)
'Beauty, as mentioned earlier, is never, ever unfashionable even when it is priced as a luxury.' (stock photo)

John Lynch

The great George Bernard Shaw didn't always get it right. For instance, he has a character in his play 'Man and Superman' declare: "Beauty is all very well at first sight; but who ever looks at it when it's been around the house for three days?"

Shaw may have forgotten that there's an eternal quest for beauty that will leave people happy to empty their pockets to find it, underpinning some of the biggest corporations in the world.

If he was still around (and still a rock-solid socialist), even Shaw might be impressed by the fact that some of the best recent investments have been in high-end cosmetics, a sector that has done two remarkable things.

It has largely fended off the recession and also found an accommodation with the internet.

Our target company today, New York-based Estee Lauder, sits comfortably in that bracket.

This may be the reason it is attracting some takeover gossip around the American water coolers.

Estee Lauder is one of the world's leading producers and marketer of beauty products.

With headquarters on the famed Fifth Avenue, it has global sales of $13.7bn (€11.79bn) and employs 46,000, 84pc of whom are female.

It sells in 150 countries and includes brands such as Bobbi Brown, Clinique, Jo Malone, Aveda, La Mer and, of course, Estee Lauder.

Skin care, makeup, fragrance and hair care are the key products. Makeup (lipstick, foundation and mascara) represents the biggest share of sales closely followed by skin care, which includes moisturisers, serums and cleansers.

The group strategy is to grow brands and acquire new ones, which sounds simple if you can do it, which the company has done in fine style.

It has added brands such as Becca, Glamglow and Too Faced, while at the same time sustaining the success of its older products.

Over the past five years, Estee Lauder online sales have more than doubled and now account for 13pc of total sales, driven by the US and UK.

However, China, its third largest market, doubled its online sales last year.

Estee Lauder has a global footprint but the Americas and Europe account for four-fifths of total sales. Asian sales are expected to increase, helped by the resurgence of business in China.

Last year, European business performed well with sales increasing in most countries. Sales in Latin America saw strong growth but US sales cooled due to struggling department stores, which represent a sixth of Estee Lauder's total sales.

Since the appointment in 2009 of Italian Fabrizio Freda as chief executive, Lauder investors have been smiling. Market value has rocketed from $6.6bn to $52bn. It has outperformed the S+P index and its rival L'Oreal. Sales have increased for many straight quarters and its recent results did not disappoint, with sales of $13.7bn and net income of $1.1bn.

The group returned $900m to investors through dividends and stock repurchases. Its shares trade at $145 down from its yearly high of $159 but 40pc above its yearly low.

Regrettably, results were somewhat tarnished by the groups' admission of false product advertising.

Beauty, as mentioned earlier, is never, ever unfashionable even when it is priced as a luxury.

Consequently, no one was too surprised to hear Unilever has been sniffing around Lauder.

The notion of a takeover bid from Unilever would make some crude sense, but the family controlled group that still controls Estee Lauder is firmly shaking its corporate head.

Deep pockets would be needed as Estee Lauder has an extremely hefty market value.

It may be that investors are happy to continue to support Mr Freda and ignore any takeover overtures at this time.

With Nestle considering selling its L'Oreal stake, this sector could see some action.

However, Estee Lauder is a good share with elevated price earnings multiple.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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