Eye of the Beholder: Would You Invest in These Profitable Beauty Stocks?

Mary-Lynn Cesar, Kapitall: Will investing in these profitable beauty stocks be good news for your portfolio?

January has been a mix of bad and good news for beauty stocks.  Earlier this month, both Revlon (REV) and L’Oreal (OTC:OR:FP) announced plans to trim their operations in China due to underperformance. Revlon will exit the country completely, cutting approximately 1,100 jobs, whereas L’Oreal will cease to sell its Garnier line, which was introduced to the Chinese market in 2006.

However, not all of the news coming out of the beauty industry is bad. Japanese makeup giant Shiseido (OTC: 4911) released its financial results report for the first three quarters of fiscal year 2013 today, and the company reported a 267.2% year-over-year increase in net profit.

Read more about growth in beauty from Kapitall: 3 Rallying Beauty Stocks With High ROE

For the nine month period ending December 31, Shiseido generated $168.65 million (¥16.75 billion) in comparison to the $45.93 million (¥4.56 billion) posted during the same period in fiscal year 2012. The company also revised its outlook for the entire year in the report, raising its projected net profit by 26.7% to $185.44 million (¥19.0 billion) from its previous forecast of $146.4 million (¥15 billion).

Investing ideas

Shiseido's soaring net profit inspired us to take a closer look at profitable beauty stocks publicly traded on US exchanges. We began by constructing a universe comprised of personal products companies, limiting our list to firms that offer beauty products.

Next, we screened for stocks that have a profit margin greater than the industry average. Profit margin tells how much money a company keeps in earnings out of each dollar it makes in sales. For example, the profit margin industry average for personal products is 9.36%; if a company has that as its profit margin, it means that the company has a net income of $0.0936 for every $1 of sales. Profit margin is calculated by dividing net income by sales.

We then ran another profitability screen, this time looking for stocks with a healthy return on equity (ROE) greater than the industry average. ROE measures a firm's profitability by expressing a company's profits as a percentage of shareholder equity.

For our last screen, we further narrowed down our list by only including those with return on assets (ROA) higher than the industry average. ROA is a performance metric that assesses a company's ability to use its assets to generate earnings. It is calculated by dividing net income by total assets (debt and equity). A company can use its assets to finance its operations, so when a stock has a high ROA, it shows that the company is efficient in using its assets to make investments that earn significant amounts of money.

We were left with three profitable beauty stocks on our list.

Click on the interactive chart below to see sales data over time.

Do you consider these profitable beauty stocks to be attractive investments? Use this list as a starting point for your own analysis.

1. United-Guardian Inc. ( UG): Develops, manufactures, and markets cosmetic ingredients, personal and health care products, pharmaceuticals, and specialty industrial products in the United States, Canada, China, France, and internationally.

Market cap at $130.53M, most recent closing price at $28.65.

Profit margin at 40.10% vs. an industry average of 9.46%.

ROA at 36.10% vs. an industry average of 9.36%.

ROE at 39.60% vs. an industry average of 24.52%.
 

2. Inter Parfums Inc. ( IPAR): Engages in the manufacture, marketing, and distribution of various fragrances and fragrance related products primarily in the United States and Europe.

Market cap at $1.01B, most recent closing price at $32.47.

Profit margin at 27.50% vs. an industry average of 9.46%.

ROA at 24.70% vs. an industry average of 9.36%.

ROE at 43.40% vs. an industry average of 24.52%.

 

3. Estee Lauder Companies Inc. ( EL): Engages in the manufacture, marketing, and sale of skin care, makeup, fragrance, and hair care products worldwide.

Market cap at $26.74B, most recent closing price at $68.95.

Profit margin at 9.90% vs. an industry average of 9.46%.

ROA at 14.10% vs. an industry average of 9.36%.

ROE at 31.00% vs. an industry average of 24.52%.

 

( List compiled by Mary-Lynn Cesar, a Kapitall Writer. Quarterly sales data sourced from Zack's Investment Research. All other data sourced from Finviz.)

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