The Elephant in the Room - Estee Lauder - EL
Is Estee Lauder - EL - $87 a value stock? The stock is down more than 70% from its high just a few years ago. EL earned over $7 for the fiscal year ended June, 2022, so the stock sells at 13x that peak. There is still a 3% yield, and net debt is less than 1x EBITDA. There are only 10 buys, compared to 18 hold/sells, so expectations are low. For the year ending 6/26 the estimate is for only $4. EL has solid market shares of 20%+ in makeup, fragrances, and skin care. As a value stock it is almost TGTBT - to good to be true. The market cap is over $30 billion, so compared to the other “big uglies”, how bad can it be?
Here are my concerns:
Most of the problems are in China, and/or Chinese citizens that once traveled and bought boatloads of skin creme. Life is much easier if you do not have to figure out what the hell is happening in China.
The US business has had its problems as big brands put up new counters in Target and Kohl’s. EL has not not done that well online, and their department store customers would not be happy if they did.
I guess I can kind of partially understand makeup and perfume, but the skin creme business always has a tinge of “snake oil” in my very uniformed opinion.
Just like the liquor companies, too much of the growth has come from up-selling customers to higher price points
Both the CEO and CFO are planning to leave in the next year.
EL’s voting stock is still controlled by the family, so changes could be slow.
Even the CFO admits that barriers to entry into the cosmetics business have declined in the past 10 years. We will review the competitors soon.
EL’s main competitor, the French company L’Oreal, is 10x larger
Too much of the growth has come from pricy acquisitions
No value guys show up as holders so far
I just cannot get that excited. What is the true earnings power? I avoided Avon as a value trap for the first 15 years of my career.
Maybe the family will hire an evil financial guy to slash costs, but I doubt it.
My favorite big cap stocks are : Halliburton, Tyson, and Kinder Morgan.
Let’s rank the other value stocks with market caps over $15 billion, and yields of at least 3%, that are at least 20% off their highs:
Dow - DD - $51 - A 5% yield and the simple idea that abundant natural gas supplies will make US petrochemicals very cost competitive. The a 30% of business tied to housing might be an issue.
Phillips 66 - PSX - $128 - Refining margins are at 5-year lows, and 30% of the business is petrochemicals
Devon Energy - DVN - $31 - the best natural gas stock
Alexandria Real Estate - ARE - $116 - Drug companies will always need labs to work in
The reasonable ideas : Verizon - VZ, ConAgra - CAG, Bristol Myers - BMY, Pfizer - PFE
This is where I would put Estee Lauder - EL
Clorox - CLX - $165 - coming back from being hacked, kind of interesting
Stanley Black & Decker - $97 - SWK - too housing reliant
All the big utilities are here - I like some of the REIT’s better
Southern Cooper - SOCC - 80% copper, 50% Mexico 50% Peru, well run but Freeport is better. Someday I want to look at Hudbay - HBM
Hewlett Packard - HPE - $18 - the old Compaq business, too tied to data centers
Comcast - CMCSA - $40 - All the big value guys own this, but I just do get their idea. NXST is much better.
Archer Danials - ADM - $59 - This is an old favorite, but I fear the politics of HFCS and ethanol
Skyworks Solutions - SWKS - $99 - too much (65%) exposure to Apple
Baxter - BAX - $18 - Royalty Pharma is better, and several others
Ford - F - $11 - too many issues in the finance business