Long-established in the Consumer Packaged Goods industry, The Estee Lauder Companies Inc (EL, Financial) has enjoyed a stellar reputation. However, it has recently witnessed a daily loss of 1.43%, juxtaposed with a three-month change of -16.71%. Fresh insights from the GF Score hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of The Estee Lauder Companies Inc.
Understanding the GF Score
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
- Financial strength rank: 5/10
- Profitability rank: 8/10
- Growth rank: 1/10
- GF Value rank: 2/10
- Momentum rank: 1/10
Based on the above method, GuruFocus assigned The Estee Lauder Companies Inc the GF Score of 56 out of 100, which signals poor future outperformance potential.
Company Overview
The Estee Lauder Companies Inc is a leader in the global prestige beauty market, participating across skin care (51% of fiscal 2024 sales), makeup (29%), fragrance (16%), and hair care (4%) categories, with top-selling brands such as Estee Lauder, Clinique, M.A.C, La Mer, Jo Malone London, Aveda, Bobbi Brown, and Origins. The firm operates in more than 150 countries, generating 30% of revenue from the Americas, 39% from Europe, the Middle East and Africa (including travel retail), and 31% from Asia-Pacific. Estee Lauder sells its products through department stores, travel retail, specialty multibrand beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.
Financial Strength Breakdown
The Estee Lauder Companies Inc's financial strength indicators present some concerning insights about the company's balance sheet health. The Estee Lauder Companies Inc has an interest coverage ratio of 4.26, which positions it worse than 64.85% of 1,434 companies in the Consumer Packaged Goods industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Score is just 2.83, which is below the safe threshold of 2.99. Although this does not imply immediate danger of financial distress, the stock may face some financial struggles if the Altman Z-score drops below 1.81. Additionally, the company's low cash-to-debt ratio at 0.24 indicates a struggle in handling existing debt levels.
Additionally, the company's debt-to-Ebitda ratio is 5.72, which is above Joel Tillinghast's warning level of 4 and is worse than 80.36% of 1,487 companies in the Consumer Packaged Goods industry. Tillinghast said in his book “Big Money Think's Small: Biases, Blind Spots, and Smarter Investing” that a high debt-to-Ebitda ratio can be a red flag unless tangible assets cover the debt.
Growth Prospects
A lack of significant growth is another area where The Estee Lauder Companies Inc seems to falter, as evidenced by the company's low Growth rank. The company's revenue has declined by -0.6% per year over the past three years, which underperforms worse than 73.48% of 1,757 companies in the Consumer Packaged Goods industry. Stagnating revenues may pose concerns in a fast-evolving market.
Over the past five years, The Estee Lauder Companies Inc has witnessed a decline in its earnings before interest, taxes, depreciation, and amortization (EBITDA). The three-year growth rate is recorded at -21.4%, while the five-year growth rate is at -3.2%. These figures underscore potential challenges in the company's profitability. Lastly, The Estee Lauder Companies Inc predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.
Conclusion
The Estee Lauder Companies Inc's financial strength, profitability, and growth metrics, as highlighted by the GF Score, suggest potential underperformance. The company's challenges in managing debt, coupled with declining revenue and profitability, paint a picture of a firm facing significant hurdles. For investors, these insights underscore the importance of a cautious approach when considering The Estee Lauder Companies Inc as a potential investment. As the company navigates these challenges, it remains to be seen how it will adapt and evolve in the competitive beauty market. GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
