Dealmaker’s Diary: This Cosmetics Giant Paints a Pretty Picture

Alpesh Patel|October 10, 2024

Have you been doing any “lipstick spending”?

That’s the attractive way to describe how consumers have adapted to a higher cost of living.

Instead of having your kitchen redone, you DIY a paint job.

In other words, put a bit of lipstick on things to make them look better.

Now, my Stock of the Week doesn’t need lipstick to make itself look better… even though that’s what it sells.

It has a strong retail and online presence around the world… while adapting to shifting consumer trends.

Need proof? Just look to its head-turning 71% profit margin.

That’s huge in a rapidly changing marketplace.

This just might be the perfect foundation for a beautiful investment.

Get all the details on the company – including its ticker – in my latest video.

This the kind of research my clients pay thousands for… but you get it for FREE as a Total Wealth subscriber.

Click on the thumbnail below to watch.

TRANSCRIPT

Hi, friends. I am not in my usual office – and I’m also not wearing Estee Lauder (EL) makeup, which is the Dealmaker’s Diary Stock of the Week.

(Excuse any background noise because I’m on a laptop, not in the usual office.)

Now, what do I like about this company? Well, there’s a narrative and a data story.

I like the data, the numbers. They’re more important… such as gross profit margin, for instance. And I’m going to go through some of the numbers.

But the narrative’s interesting.

In austere times, when the cost of living is high, inflation is high, bank interest rates are high, people tend to do “lipstick spending.” In other words, they can’t afford a new kitchen, so they do a paint job at home.

In other words, put a bit of lipstick on it to make things look better. That’s the narrative behind why this stock might do well.

Let’s just dive deeper into some of those numbers. On my proprietary Growth-Value-Income algorithm that I have, which looks at the valuation of a company, its revenue growth, and dividend yields, this is a 7. It meets my minimum criteria.

With the forecast P/E, there’s no two ways of getting around it. It is expensive. You’re paying $33 for every dollar of expected profit. That means that there are high expectations of profitability for the company. That’s not necessarily a bad thing that it’s high. It’s just that the valuation is expensive.

However, cash return capital invested (CROCI) is not bad. I would have preferred it to have been over 10%. Click here to see why Goldman Sachs Wealth Management expects companies in the top 25% of CROCI to deliver exceptional returns.

Estee Lauder slightly misses that, but it’s still a good solid number.

The other number which caught my eye was volatility at 16%. It’s below 20%, which is good. That ticks the box. Not everything can ever tick the box, but that certainly ticks the box for what I’m going for with Estee Lauder.

It’s slightly high risk with a return alpha below zero.

And the stocks has been absolutely beaten down.

Now, that’s not the reason alone to go into something. What we’re looking for is a turnaround of momentum.

I know it’s relatively overvalued, but despite these faults, it is cheaper than it has previously been. It is near the bottom end of its valuations. It’s historically had relatively high valuations around 33, maybe dropped to about 20 before.

So it’s at levels it’s seen before it climbed.

Now here’s the interesting thing… If you look at the momentum here, the monthly and the weekly, it looks like this might be about to turn around. There are no guarantees, of course, and the past is no guarantee of the future. If we get back to where it was at the start of the year, you’re looking at a really healthy rebound and a healthy return, and that’s the angle I’m going for.

On a discount cash flow basis, it is undervalued.

So for forecast P/E, overvalued… discount cash flow, undervalued.

Doesn’t necessarily mean that that’s definitely going to go up, but ticks another box on that as well.

So that’s how I see it. For a very famous old French brand, names you will have come across, such as MAC, Clinique, etc. And it’s a shame when some of these brands actually fall by significant sums. I mean, this has lost two-thirds of its value, but there is brand equity in there, which is intangible.

So quite a few reasons to think positively about the stock.

Hope you enjoyed that. Thank you very much.