Monday, 17 August 2015

Estee Lauder - tough to get timing right but still a short

The last time I wrote on Estee Lauder was around eighteen months ago where I concluded:

'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...'

Well...that was not too successful a the share price chart for the last couple of years shows:

Today's numbers in summary leads me to a broadly similar conclusion.  Today's numbers superficially looked strong with the observations in the press release of: 

   'Net Sales in Line with Expectations, EPS Better Than Anticipated
Fiscal 2016 Sales and Earnings Outlook Remains Strong'

The company also noted a 6% rise in FY15 constant currency sales and hopes for 6-8% in their FY16 plus accompanying double digit earnings growth. 

However scrape below the surface and things are not as good as the outlook statement highlights:

'While the Company's business is performing well overall, it continues to experience economic challenges in certain countries around the world. The Company is cautious of slower retail growth in Hong Kong and China, a decline in spending by Russian and Brazilian travellers, the impact of the MERS virus on its travel retail business in Korea and the impact of unfavorable foreign exchange due to the strength of the U.S. dollar in relation to most currencies'.

And then there are the more technical aspects including difficult comparisons...

The comparison of the Company’s fiscal 2016 first quarter and full year results with the prior-year periods will be affected by the previously mentioned July 2014 accelerated orders.

...and higher costs as the company's sales network was extended.  

The question then becomes what valuation do you place on this.  Recent history has been super solid with 5 year CAGR growth of 19%...

...and specific sub brand growth in excess of 20%: 

...and hence the current valuation of a x26 P/E and a c. x18 EV/ebit rating is high versus the broader market.  Easy to conclude then that given some of the issues/translations/comparisons above that the shares are overvalued. One pushback would be the cash flow which during their FY15 was around US$1.5bn (used to buyback shares and fund the current 1% dividend given the negligible current net debt level) - a free cash flow level equal to around 4.5% a share - and also one they perceive working capital improvements via tightening up in inventory management could potentially be augmented.  

That seems quite plausible - and putting the stock on a 5% free cash flow yield would suggest a flag at the US$77.50 share price level.  So certainly not a buy today - in fact quite conceivably a short.  

So still not a stock I am particularly impressed by.  

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