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Estee Lauder Companies Inc (EL), Elizabeth Arden, Inc. (RDEN): Betting on Make-Up

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The cosmetics market is poised to grow during the coming decades. As emerging markets such as Brazil, Mexico, India, and China grow, the number of middle income families soars. Once families become richer, their consumption patterns change. According to Nielsen, cosmetics are one of the first categories that families include in their portfolio when they feel richer. The reason? Women are usually the ones in charge of going to the store. Here I take a look at three global leaders in the cosmetics market.

Top brands, rich valuation

Estee Lauder Companies Inc (NYSE:EL)

Estee Lauder Companies Inc (NYSE:EL), the global manufacturer of skin care, make-up and hair care products, counts on strong brands, such as Estee Lauder, Clinique, MAC and Bobbi Brown, and distribution networks. The company has robust top-line momentum (with sales expected to grow by 8% in 2013), which I would expect to continue throughout 2013 thanks to the resurgence in consumer spending in the U.S. and some emerging markets, such as Brazil. It’s important to stress how this resurgence in consumer spending is happening above all among upper income consumers, which is the group that buys products from Estee Lauder Companies Inc (NYSE:EL). Besides, the company keeps on gaining market share, which I think its the most relevant information for any consumer goods company.

Given that the company trades at a 2013 P/E of 25 and pays a (low) 0.30% cash dividend yield, I would not go long at current prices. It’s a good company but its price seems a little bit too high. Besides, its $15.5 billion market capitalization makes Estee Lauder Companies Inc (NYSE:EL) a tough M&A target.

A perfect M&A target within the space

While growing its top line fast at 10.5% year-over-year, Elizabeth Arden, Inc. (NASDAQ:RDEN) continues to make good progress on its key growth initiatives: (A) the repositioning of its Elizabeth Arden brand (with the ambitious goal of doubling sales by 2018), and (B) growing its Western European fragrance sales and market share.

Since not everything could be good news at the company’s results, gross margins declined by 1% to 49%, owing primarily to negative
product mix. That said, I am convinced that Elizabeth Arden, Inc. (NASDAQ:RDEN) will continue to deliver healthy earnings growth, driven by its ability to control cost expenses and grow its top-line aggressively without damaging margins in a significant way.

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