Wednesday, 5 February 2014

Estee Lauder - i'm still struggling with the valuation

I have struggled with the valuation of Estee Lauder for a little while now.  Back in early November I posted that:

'In terms of growth profile for their FY14, the company sees 6-8% constant currency sales growth and (mid-range) just over 6% EPS growth. 

For x16 EV/ebit FY14e prospectively that seems a full valuation'.
So what did they say today?
Well the good news was that they reaffirmed (and slightly tightened) the above EPS guidance to US$2.80-2.87.  Less good though was the sales progression at only +3%.  The company commented that:
'Key drivers of our sales gains in the quarter were the United States and the United Kingdom, our luxury and makeup artist brands, and online and travel retail channels. These factors and continued strength overall in emerging markets more than compensated for soft results in certain European countries and solid but slowing Chinese market growth'.
Looking though region-by-region, I noted that Asian revenues were down 6% with a combination of mixed markets and FX translation issues impacting.  Americas revenues, by contrast, were up 5%.
Going hand-in-hand with the weaker sales than hoped in the quarter to the end of December were earnings that were down year-on-year ('diluted net earnings per common share were $1.09, versus a comparable $1.16 in the prior-year period') although this had been impacted by a SAP enterprise software integration and the company did later note that:
'Excluding the impact of the (SAP) shift and restructuring activities, net sales in local currency and operating income for the three months ended December 31, 2013 would have increased 7% and 11%, respectively'.
So in essence numbers were reiterated despite various global external challenges and SAP integration internal challenges. 
The shares are called to open up north of the US$70 level today in US trading.  It is delivering with hopes but I am still struggling with the x16 EV/ebit valuation. 
So assuming a 'greater fool' is not going to bid for them, Estee Lauder remains for me a company that provides useful short-side protection in times of strife...just as it has in the last month or so. 

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