Estee Lauder - Strong Guidance For 2015 Creates An Excellent Long-Term Investment Opportunity

| About: The Estée (EL)

Shares of Estee Lauder (EL) the diversified producer of skin care, make up and fragrances, reported its fourth quarter results on Tuesday. Shares of Estee Lauder rose more than 9% in a reaction to the results.

Fourth Quarter Results

Estee Lauder reported fourth quarter revenues of $2.25 billion, up 9% compared to 2011. Excluding the adverse impact of a strong dollar, revenues would have grown 12%. The company reported a 25% increase in net income to $51.2 million. Diluted earnings per share rose from $0.10 to $0.13.

For the full year of 2012, the company reported revenues of $9.7 billion, up 10% compared to last year. Operating profits rose 22% to $856.9 million as margins expanded by 110 basis points. Diluted earnings per share rose 24% to $2.16. The company took full year restructuring charges of $44.1 million after tax, impacting earnings by $0.11 per share.

CEO Fabrizio Freda commented on the results, "A very strong fourth quarter, in which we generated double-digit growth in sales, excluding currency, and earnings per share, was driven largely by continued momentum in the US and strong growth in China and travel retail."

Segmental Information

For the fourth quarter, North American revenues rose 8% to $950 million. Revenues in Europe, the Middle East & Africa rose 11% to $875 million, or 18% in local currencies. The company reported solid growth despite economic uncertainties in the region. Asia-Pacific revenues rose 9% to $429 million, or 10% in local currencies. Growth was driven by a strong performance in China and Hong Kong.

Growth was driven across all product categories. Skin care, make-up, fragrance and the hair care division each reported revenue growth between 8 and 11%.


Estee Lauder remains confident in its strategy to leverage the global reach of its diverse and powerful portfolio of brands. The company continues to focus on emerging markets, digital and travel. The company is confident in its long term growth prospects, and raises its operating margin target to 15.5%-16% in 2015.

For the first quarter of its fiscal 2013, the company guides for a 5-7% increase in revenues on a constant currency basis. A strong dollar will negatively impact sales by 4.5%. Diluted earnings per share are expected to come in between $0.68 and $0.74.

For the full year of 2013, the company expects net sales to increase by 6-8% on a constant currency basis. The strong dollar negatively impacts sales by 3.5% for the full year. Diluted earnings per share are expected to come in between $2.39 and $2.51.


Estee Lauder ended its fourth quarter of its fiscal 2012 with roughly $1.35 billion in cash and equivalents. The company operates with $1.29 billion in short and long term debt, for a small net cash position of $60 million.

The market values Estee Lauder at $23.4 billion. This values the firm at 2.4 times 2012's annual revenues, and 28 times annual earnings. The valuation compares to a revenue multiple of 0.6 times for troubled competitor Avon Products (AVP).

Estee Lauder pays an annual dividend of $0.52 per share, for an annual dividend yield of 0.9%.

Investment Thesis

Year to date, shares of Estee Lauder trade with gains of 7%. Shares steadily rose from $56 per share to peak at $65 in April this year. Shares saw a 25% correction in line with other high-end brand names, and traded around $50 in July. The company issued a cautious guidance for the fourth quarter.

Investors are rewarding Estee Lauder for its consistent long term value-creating strategy. Shares more than five-folded from their lows of $11 in 2009. Consistent strong revenue growth, combined with strong exposure in emerging markets, are boosting operational performance. At the same time, leveraging the portfolio of strong brands will continue to boost margins. Estee Lauder aims to boost operating margins from a current 9% to 15-16% in three years time.

Despite a premium valuation, shares have seen long term outperformance. Strong revenue growth and margin expansion could double earnings by 2015.

While I see few triggers for short term outperformance, shares do represent an excellent long term investment opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.