(By Mani) Shares of Estee Lauder Companies Inc. (NYSE:EL) could come under pressure due to a combination of its strong relative performance and a weak macro backdrop. However, its investment in Asia should drive growth in the coming years.
Estée Lauder makes prestige skin care, makeup, fragrance, and haircare products. Its worldwide brands include Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, Aveda, and Jo Malone. Lauder is also the global licensee for fragrances and cosmetics sold under the Tommy Hilfiger and Donna Karan brands.
With a constant stream of negative news out of Europe and China, Estee Lauder shares have sold off over 20 percent since April. Year-to-date, the stock has underperformed consumer staples by 17 percent points and its luxury peers by 440 basis points. As a result of this selloff, the company''s P/E has come down by 5 turns contracting more than its luxury peers.
Investors generally look to consumer staples companies for visibility, sustainability and consistent returns. While stocks fluctuate in the near term, those companies that have delivered 10 years of 10 percent plus annual organic EPS growth have been rewarded with superior performance and relative returns.
"We believe Estee Lauder will be the next company to deliver 10% EPS growth per annum through 2020," UBS analyst Nik Modi wrote in a note to clients.
Estee Lauder generates more than 70 percent of its sales growth and 80 percent of its earnings before tax from developed markets such as North America/Europe. The company still needs to derive growth from Asia, where it is investing heavily and is likely to reap benefits in the coming years.
"On top of share gains in its key developed markets, we believe the Asia Pacific region offers the brightest opportunities for whitespace expansion in the prestige beauty market, largely due to a combination of robust market sizes and relatively low share positions for Estée," Modi noted.
Additionally, the Asia Pacific region boasts very favorable demographics over the long-term for prestige beauty companies. The region houses 56 percent of the world's population but represents only 34 percent of the world's spending on prestige beauty products.
The average Asian consumer spends roughly $6 a year on prestige beauty, compared to the North American and Western European consumers who spends well over $40 per year.
Assuming Estée maintains a 10 percent market share position of prestige beauty in Asia, the analyst said that every 10 percent increase in prestige beauty per capita spending would equate to roughly $200 million in revenue for Estée or add 300 basis points to EPS growth.
While the overall category growth for prestige beauty in Asia should continue to be positive for some time to come due to increasing higher incomes, there is considerable share opportunity.