Estee Lauder (
) impressed during its fiscal first quarter ended October 29 with a
well-executed strategy in response to a recessionary macroeconomic
outlook and addressed critical issues in its business.
Estee Lauder makes premium skin care, makeup, fragrances and
hair care products, which it sells through various high-end outlets
across the globe. The company competes with well-known product
manufacturers like Revlon (
), Avon Products (
). Estee Lauder's brands include Aramis, Clinique, La Mer,
Aveda and designer brands such as Donna Karan, Tommy Hilfiger,
Michael Kors and Sean John.
We currently maintain a
price estimate for Estee Lauder's stock at
, well below the current market value. However, the recent earnings
report signals potential upside to our projections.
Upside to Skin Care Market Share
We estimate that more than half of Estee Lauder's stock value is
generated by its skin care segment. This is primarily due to robust
growth in the global skin care market and the rapidly growing
demand for anti-aging skin care.
Estee Lauder has harnessed this trend by launching a wide range
of anti-aging skin care products including Repairwear Laser Focus
Wrinkle & UV Damage Corrector, All About Eyes Serum De-Puffing
Night Massage and Youth Surge Night Age Decelerating Night
Moisturizer from Clinique.
Estee Lauder's fiscal year Q1 skin care sales rose 17%
year-over-year (YOY) as the company's Clinique brand gained 0.7
points of market share in the skin care segment between January and
September. The company's namesake Estee Lauder brand also gained
0.2 points of market share during the same timeframe.
We currently forecast a rise in market share from just over 6%
in 2010 to nearly 7% in 2012. If Estee Lauder can increase its
market share 50 basis points beyond our estimates by 2012, there
could be 4% upside to our $53.28 stock price estimate.
Modify the chart below to see the impact of various skin care
market share scenarios on Estee Lauder's stock value.
Improving Mix of Higher Margin Products
Estee Lauder's skin care operating income demonstrated a sharp
31% YOY increase during fiscal Q1′10, primarily due to favorable
mix impact as sales of higher margin products increased alongside
improving macroeconomic conditions.
Further economic recovery (rising employment and disposable
income levels) could lead to a further rise in sales of premium
products. If this rise in operating income were to continue
throughout Estee Lauder's fiscal year, the company's EBITDA margin
(a measure of the flow-through of sales revenue to operating
profit) could reach roughly 20% in 2011, up from its current level
of 17.5%. This change alone would produce almost 10% upside to our
Modify the chart below to see the impact of various EBITDA
margin scenarios on Estee Lauder's stock value.
Should the two scenarios detailed above materialize, we estimate
a 15% increase to our estimated stock value. Despite the potential
upside, our price estimate would still remain close to 20% below
Estee Lauder's current market value.
See our full analysis for Estee Lauder here