2 Small Companies In The Beauty Products Market To Look At

| About: Inter Parfums, (IPAR)


IBD Cosmetics and Personal Care industry group has gained 32% so far in 2014.

Global cosmetic sales are expected to grow by approximately 5% annually.

Demand will be driven by the increasing middle class in developing nations.

The beauty and cosmetics industry overview

The desire to look beautiful and yet different is greater than ever. This strong demand has helped the IBD Cosmetics and Personal Care industry group to gain 32% so far in 2014, which places it in the top third of the almost 200 industries tracked by IBD. The 29 companies in this group produce beauty products and cosmetics such as products for hair, skin, make-up, perfume and so on.

Industry sales in 2012 came to $433 billion throughout the world and just under $70 billion in the United States alone. Global sales are expected to grow by approximately 5% annually, reaching $562 billion by 2017. Sales in the United States are expected to grow at approximately 3.5% annually over the next few years to reach more than $81 billion by the same year. The recession in Europe and sluggish growth in the United States and Japan has been offset by surging demand in emerging markets driven by growth in population as well as income.

For instance, Procter & Gamble's (NYSE:PG) emerging markets sales have grown at an average of 14% over the last 10 years, and the company now generates roughly 60% of its revenue outside the United States. The company estimates that the global population will grow by approximately 10% over the next decade, with more than 90% of this growth in the middle class in developing markets. Similarly, the largest cosmetics company in the world, L'Oreal, generated 40% of its 2013 revenue from what it classifies as new markets in areas such as Asia and the Middle East/Africa.

The combination of cosmetics and biotechnology has created a new category of products called cosmeceuticals which is the fastest growing category in the industry. These products use ingredients such as enzymes and proteins to create anti-aging treatments and multiple-use products, such as sun protection treatments combined with foundations. Sales in 2011 were estimated at over $30 billion, and the market is expected to grow annually at a rate of 8% over the next few years.

The industry in the US is dominated by just six companies, including the likes of Procter & Gamble, Johnson & Johnson (NYSE:JNJ) and Unilever (NYSE:UN), which account for more than 20% of market sales. In this article, I propose to look at two smaller companies.

Nu Skin Enterprises (NYSE:NUS)

Nu Skin Enterprises announced extremely impressive, and record-breaking, results for its fourth quarter, with growth of 82% in revenue, to $1.1 billion, and a 108% growth in EPS to $2.02 per share when compared with the same quarter of the previous year. For the full year 2013, revenue grew 49% to $3.2 billion. In greater China, revenue grew by an amazing 248% in the fourth quarter from $138.3 million in the previous year to $481.6 million. Growth in the Asia-Pacific and North Asia was 57% and 16% respectively. Revenue in North America rose 59%, while sales in Europe were up by 21%. The company has raised its dividend by 15% and expects EPS of approximately $0.90 per share for the current quarter though the consensus estimate of analysts is higher at $0.94.

After the Chinese authorities cracked down on direct selling companies like Nu Skin and commenced investigations, Nu Skin was fined the relatively insignificant amounts of $524,000 for selling unregistered products and $16,000 for selling products with incomplete documentation, while six employees were fined $244,000 for unauthorized promotion. The company has agreed to pay the fines and, hopefully, its problems in its fastest-growing and most important region is now over, and concentration on normal business can resume.

The bottom line

There are two important questions to be considered when looking at an investment in this stock. The first is, having rewarded investors handsomely so far, will this trend continue in the future? The answer is that having settled its problems in China and judging by the latest results, the growth trajectory should continue. The second question is regarding the investment risk due to direct-selling companies being under heavy fire with accusations of the companies being pyramid schemes. The answer to this is that the company generates handsome revenue from genuine sales of its products, and there should be no immediate adverse effect. Given its growth prospects, the stock is cheap at its current price of $86.42, translating to a P/E of just over 14 times earnings. I can see an upside of at least 20% at the current time.

Inter Parfums, Inc. (NASDAQ:IPAR)

Inter Parfums, Inc. is the leading fragrance partner for a number of big brands, such as Lanvin, Montblanc and Jimmy Choo, operating in more than 100 countries throughout the world. However, in October 2012, the company announced the termination of its Burberry business with an effective date of March 31, 2013. This had a negative impact on revenue growth, although it resulted in a one-time gain of nearly $200 million.

For the fourth quarter of 2013, the company reported revenue of $105.5 million, down 40% from the same quarter of the previous year. The net loss attributable to shareholders was $4.2 million ($0.13 per diluted share) compared with net income of $99.6 million ($3.24 per diluted share) in the previous year, which included the one-time gains from the termination of the Burberry business. For the year 2014, the company expects revenue to rise by 15% to $495.0 million resulting in an EPS estimate in the range of $0.93 to $0.98 per share.

The bottom line

The company appears to be recovering nicely from the loss of the Burberry business and is continuing to launch new products. However, I believe that the current price of $34.67 is a fair valuation, and there are no immediate catalysts that could provide short-term appreciation. It may be in an investor's best interest to see how the company performs in the short-term before considering any investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.