Beauty is a valuable commodity, and emerging markets will further fuel profits for beauty suppliers. But are companies hitting the key on changing markets? And, most importantly, are they cashing in on those changes? With different success, Avon Products, Inc. (NYSE:AVP), International Flavors & Fragrances Inc (NYSE:IFF), and Estee Lauder Companies Inc (NYSE:EL) have done it.
Emerging markets are key
Leader in skin care, makeup, fragrance, and hair care, Estee Lauder Companies Inc (NYSE:EL) focuses on high-end products. The firm has recently been in the press, due to high management replacements and because third quarter results barely missed consensus estimates. However, can slower performance and managerial renewal hurt shareholders who outweigh market preferences?
Right now, attention is set on returning its market performance to previous levels. For the long haul, Estee Lauder Companies Inc (NYSE:EL) has to retain and expand, when possible, its market share. Cash volumes are expected to increase, aided by strong brand recognition, loyalty, and a new pool of customers in emerging markets.
The balance sheet is spotless. During the last decade revenue, net income, and cash flow took on an upward trend. Additionally, debt remained stable while operating margin rose 4 points, reaching the industry average of 14.5%. Last, the company generated a small economic moat through a diverse portfolio, an assertive marketing campaign, and further integration of local preferences to products.
Currently trading at 25.77 times consensus earnings, carrying a 16% premium to industry consensus, its dividend yield stands at 1.61%, making the stock not very attractive. Nevertheless, Estee Lauder Companies Inc (NYSE:EL) has a history of paying dividends, and new customers at emerging markets will pay for future dividends. It is recommended to buy because prospects are good and the premium is moderate.
Emerging markets demand new products
International Flavors & Fragrances Inc (NYSE:IFF) develops and distributes flavors and fragrances for third parties like the company previously analyzed. Principal customers are found in the perfumes, cosmetics, soaps, detergents, flavored products, prepared foods, beverages, dairy foods, and pharmaceuticals, among other segments. Can this business model continue to succeed and pay dividends amid market changes?
In the short run, International Flavors & Fragrances Inc (NYSE:IFF) has to continue high research and development levels to meet a rising demand for new products destined for emerging markets. This, coupled with some pricing power, moderate competition, and high barriers to entry, granted the firm a small economic moat. Additionally, because the ingredients segment has seen a small retreat during economic harshness, management has tweaked the model in order to improve revenues for the long run.
Financially, International Flavors & Fragrances Inc (NYSE:IFF) is clean. Revenue, net income, and cash flow have seen steady increments during the last ten years. Meanwhile, operating income oscillated in the high teens, and debt remained stable in the same period. Today, the company almost doubles the industry’s average operating margin, and holds enough cash to feed the pipeline.