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e.l.f. Beauty - Idiosyncratic Risks Are Too High

Mar. 08, 2021 2:09 PM ETe.l.f. Beauty, Inc. (ELF)1 Comment


  • Recent share price performance has not compensated investors for high business risk.
  • Free Cash Flow faces significant headwinds from profitability, working capital and topline growth point of view.
  • Insiders have increased their selling activities over recent months.
  • Relative pricing of e.l.f. Beauty appears too optimistic at this point.

Source: ELF Investor Presentation

e.l.f. Beauty (NYSE:ELF) has been on a tear over the past year, thus outperforming most large cap names in the beauty space.

However, there is one problem with this return over the past year - it does not compensate for the extremely high risk. Simply looking at market risk exposure, as measured by the beta, ELF is significantly riskier than the high quality names in the space, such as Estée Lauder (EL) and L'Oréal (OTCPK:LRLCY).

Source: prepared by the author, using data from Yahoo!Finance

Thus to compensate for the market risk over the past year, ELF should have returned approximately 52% based on the S&P 500 return over the same period and risk-free rate at around 1.5%.

Therefore, although at first glance ELF might appear as the best performer in the group, on a risk-adjusted basis it was one of the worst performers while high quality names, such as Estée Lauder and L'Oréal is where alpha has been generated.

The problems with ELF, however, do not stop there. Digging into the business and the idiosyncratic risks associated with it, there are three key problem areas that in my opinion make ELF a far inferior investment when compared to other names in the space.

The problem with profitability and free cash flow

ELF has a significant problem when it comes to some of the most important business fundamentals, such as operating profit and free cash flow. While the stock moves mostly on expectations about future topline growth, ELF's operating profit and FCF have both gone nowhere since the IPO in 2016.

More worrisome, ELF will have a hard time improving these metrics without the help of more acquisitions and leverage.

Starting with profitability, ELF already trades at too high

This article was written by

Vladimir Dimitrov, CFA profile picture

Vladimir Dimitrov, CFA is a former strategy consultant within the field of brand and intangible assets valuation. During his career in the City of London he has been working with some of the largest global brands within the technology, telecom and banking sectors. 

He graduated from the London School of Economics and is interested in finding reasonably priced businesses with sustainable long-term competitive advantages. 

Vladimir is the leader of the investing group The Roundabout Investor where he teaches the process of evaluating roundabout investments; defined by potential high capital return, growth in free cash flow, safe dividends and conservative capital allocation. He offers weekly investment ideas, a model portfolio, a watchlist, macro outlooks, and sector deep dives. Learn more.

Analyst’s Disclosure: I/we 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.

Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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Comments (1)

News from fly over country. The ladies I spoke with about this product like them. That is my analysis. Up 77 percent since I bought it.
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