ModernGraham Quarterly Valuation Of Estée Lauder

Apr.11.14 | About: The Estée (EL)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Estée Lauder (NYSE:EL) fares in the ModernGraham valuation model.

EL Chart

EL data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $69.83
MG Value $91.17
MG Opinion Fairly Valued
Value Based on 3% Growth $34.34
Value Based on 0% Growth $20.13
Market Implied Growth Rate 10.49%
Net Current Asset Value (NCAV) $2.46
PEmg 29.49
Current Ratio 2.42
PB Ratio 7.00
Click to enlarge

Balance Sheet – 12/31/2013

Current Assets $4,925,600,000
Current Liabilities $2,039,100,000
Total Debt $1,322,900,000
Total Assets $7,841,200,000
Intangible Assets $1,053,300,000
Total Liabilities $3,972,600,000
Outstanding Shares 387,950,000
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Earnings Per Share

2014 (estimate) $2.81
2013 $2.58
2012 $2.16
2011 $1.74
2010 $1.19
2009 $0.55
2008 $1.20
2007 $1.08
2006 $0.75
2005

$0.89

2004 $0.81
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Earnings Per Share – ModernGraham

2014 (estimate) $2.37
2013 $1.98
2012 $1.58
2011 $1.24
2010 $0.98
2009 $0.88
Click to enlarge

Dividend History

EL Dividend Chart

EL Dividend data by YCharts

Conclusion

Estée Lauder is suitable for the Enterprising Investor but not the Defensive Investor. The company currently trades at PEmg and PB ratios that are too high for the Defensive Investor. The Enterprising Investor is very satisfied, though, because the company passes all of the investor type’s requirements. Therefore, the Enterprising Investor following the ModernGraham approach based on Benjamin Graham’s methods will feel comfortable conducting further research into the company and comparing it to other opportunities through a review of ModernGraham's valuation of International Flavors & Fragrances (NYSE:IFF) and a Glance at the Dow. From a valuation perspective, the company appears to be fairly valued, having demonstrated growth in EPSmg from $0.98 in 2010 to an estimated $2.37 for 2014. This level of historical growth supports the market’s implied estimate of 10.49% earnings growth and leads the ModernGraham valuation model to estimate an intrinsic value that is within a margin of safety relative to the price.

Disclaimer: The author did not hold a position in Estée Lauder or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.