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

With 86% of the company’s shares floating in the market, trading at a 2013 P/E of 19 and with a market capitalization of $1.35 billion, I think Elizabeth Arden, Inc. (NASDAQ:RDEN) is a great alternative if you are looking to get exposure to the growing cosmetics market. Although the company does not pay any dividends, it is a good M&A target for many bigger competitors such as Estee Lauder Companies Inc (NYSE:EL).

Betting on Asia

Even if top-line growth is now stalled, I expect Shiseido Co. LTD. (ADR) (OTCMKTS:SSDOY) to grow its operating profit by 59% year-over-year by 2014. The main reason for its slow growth is that the business in Japan (where the company is based and generates over 50% of its sales) is almost completely stalled.

Meanwhile, Shiseido’s overseas business is growing. The company projects China sales year-over-year growth of 6% to 9%. Besides, Shiseido’s first-quarter shipments were strong. In Europe, the fragrance business has slowed since the first quarter and Shiseido
expects a decline in sales for the region so investors should focus at what might happen in China.

The risks of investing in this $5.9 billion market capitalization Japanese company are many: (1) unknown domestic brand strategy and a review of sales channels, (2) unknown Chinese business growth, and (3) the announcement (or not) of radical cost-cutting programs.

Following the recent announcement of a $290 million goodwill impairment loss on Bare Escentuals (acquired in March 2010), we need to look at 2014 estimates to value the business. Shiseido now trades at a 2014 P/E of 25, which is expensive unless the company successfully cuts costs and the Chinese side of the business revives strongly. Given that the yen is being depreciated by the Japanese central bank, it would be natural to expect costs going down sharply in US dollars and a recovery in international sales thanks to the better U.S. pricing of Shiseidos’s products.

The bottom line

The three companies named above operate in a business that is growing fast in emerging markets. While Estee Lauder is much more concentrated in premium brands, Shiseido and Elizabeth Arden, Inc. (NASDAQ:RDEN) are generalists. That said, Shiseido’s market is more concentrated in Asia and its fate depends heavily on that part of the world. Meanwhile, Elizabeth Arden is a truly global cosmetics company focused on premium and non-premium brands. The company not only trades at a fair level, but also could be a good M&A target going forward given its market capitalization.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Betting on Make-Up originally appeared on Fool.com.

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