Creme de la Mer
, the skin-care cream acquired by
in 1995, sells for $85 an ounce, beyond the reach of all but the most wealthy (or youth-obsessed) consumers. Now a short-seller and some Wall Street analysts wonder whether Estee Lauder stock is awfully pricey, too.
Estee Lauder boasts a powerhouse lineup of cosmetics brands, including
, that's second to none. Correspondingly, the company has a lot of fans on Wall Street, with most analysts giving the stock their second-highest rating. The company, which went public in 1995, recently saw its shares close at an all-time high of 56 (adjusted for June's 2-for-1 stock split). Since reporting in-line earnings last week, the stock has come down a bit and now trades at about 48.
But one short-seller says the company's valuation, at roughly 46 times trailing earnings, is too rich. The short-seller notes that in the most-recent quarter sales growth slowed and makeup sales fell, which meant that Estee Lauder matched Wall Street earnings estimates only with the help of a lower tax rate.
After listening to a tape of last week's conference call,
Standard & Poor's
analyst Robert Izmirlian on Tuesday downgraded Lauder shares to avoid from hold. While he praises the company's management and brands, he says "its multiple is a little bit scary" and leaves no room for mistakes. Instead, he's recommending
in the cosmetics area.
Izmirlian points out that Estee Lauder's net profit margin is about 7%. A consumer products company with a similar profit margin,
, trades at about 27 times trailing earnings. A similar valuation for Estee Lauder would put the company's shares closer to 28, about a 40% facial from current levels. An Estee Lauder spokeswoman says the company doesn't comment on the stock's valuation.
While some are skeptical about Estee Lauder's current share price, many say it's hard to find fault with its track record. In addition to expanding popular brands like Clinique, the company has bought newer labels like
Bobbi Brown essentials
with an eye to rolling them out internationally. Earlier this month, Estee Lauder said it would buy Los Angeles-based
, founded by Hollywood makeup artist Jeanine Lobell and a favorite of
-reading 20- to 30-year-olds.
"There's a lot of global expansion opportunity, especially for some of the new brands," says Catherine Lewis, an analyst with
Morgan Stanley Dean Witter
who rates the stock outperform. (Her firm hasn't done recent underwriting for the company.) For instance,
, the upscale botanical hair-care line acquired in 1997 for $300 million, has the potential to hit $1 billion in sales in seven years, Lewis says. Aveda currently rings up annual sales at an estimated $150 million to $200 million clip.
In short, no one is denying that Estee Lauder occupies an enviable market position. "They're showing momentum significantly better than most of their competitors," says Andy Damm, portfolio manager at
BlackRock Large Cap Growth Equity
fund, which holds more than 200,000 Estee Lauder shares.
But even with acquisitions and a recovery in emerging markets, the company's sales growth slowed in its fourth quarter ended June 30. Sales rose 7.5% to $908.7 million, slower than the 10.7%, 9%, and 10.7% growth rates seen in preceding quarters. The spokeswoman wouldn't break out the contribution made by acquisitions and says the company prefers the benchmark of annual sales, which rose 9.5% for the year ended June 30. Most analysts expect slightly slower growth for fiscal 2000, closer to 8% to 9%.
Moreover, Estee Lauder's tax rate fell to 38% last year, and is expected to drop to 37% this fiscal year. The short-seller says that lower tax rates, while good for the company, don't reflect improved operating profit. The spokeswoman says the company would have met its goals without the lower rate.
"Our commitment is to grow
earnings between 15% and 20% annually, and the tax rate is one factor," she says. "We certainly look at all different ways to reduce our expenses." (For the fiscal year ended June 30, Estee Lauder's earnings rose 16% to $1.03 a diluted share.)
Some investors were also concerned that makeup sales were down slightly during the quarter, which the company attributed to tough comparisons with the year-earlier period, when it launched new products. This year, new
color cosmetics and Clinique products should help shore up makeup sales.
In other product categories, Estee Lauder's strong lineup of skin care products (sales rose more than 18% in the latest quarter) will serve it well as baby boomers fight gravity. The company also has a powerful lineup of fragrances, with four of the top five women's brands during 1998 and two of the top five men's brands, according to market research group
. That segment should be boosted by the expansion of the Tommy Hilfiger and
fragrance lines (produced under license) as well as the introduction of the men's version of Clinique's popular Happy fragrance.
All of this bodes well for the company, say analysts and investors. But even its fans fret that at its current share price, there's little room for error. Estee Lauder's strategy "has worked very well in the past, and there's no reason to believe they won't be able to do it in the future," says Damm, the portfolio manager. "But if they miss or prove it's more difficult to apply their formula, we'll think something's wrong. We need them to perform."