The Estée Lauder Companies Inc. (EL) and Coty Inc. (COTY) are two prominent companies in the global cosmetics industry. EL manufactures, markets, and sells a wide range of skincare, makeup, fragrance, and hair care products. The company also sells ancillary products and services. On the other hand, COTY is a beauty company that manufactures, markets, and sells branded beauty products, including prestige fragrances, skin and body care, and color cosmetics products. It also sells hair and nail care products for professionals. Both companies sell their products through department stores, specialty-multi retailers, upscale perfumeries, drug stores and pharmacies, salons and spas, e-retailers, and duty-free shops.

The COVID-19 pandemic-related changes in lifestyle and lockdowns made the cosmetics industry witness an 8% decline in sales last year. However, efforts to produce high-quality skincare products and sales through e-commerce platforms helped the industry stay afloat.

Since stores are witnessing increasing foot traffic ahead of the holiday season due to the easing of restrictions, the cosmetic industry is expected to see solid sales growth. The global cosmetics market size is expected to grow at 5% CAGR and reach $415.29 billion by 2028. So, both EL and COTY should benefit.

While EL has gained 22.2% year-to-date, COTY has surged 32.6%. COTY is a clear winner with 6.9% gains versus EL’s marginal returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On September 15, 2021, EL announced that it would be working with the leading heat and cool surface technology provider, Roctool, to help implement cutting-edge practices across its brand portfolio. Roctool’s unique molding technology will support the company’s ongoing efforts to advance luxury, sustainable packaging.

On November 18, 2021, COTY entered into a licensing agreement with Orveda, an ultra-premium skincare brand in France. Given Orveda’s exceptional quality and high concentrations of proven active ingredients that produce clinical level efficacy, COTY plans to integrate Orveda’s expertise in microbiome science into its Prestige portfolio. Both the companies are looking forward to accelerating the industry-disrupting, high-performance skincare line further and gaining reach in the Chinese market.

Recent Financial Results

For the fiscal first quarter ended September 30, 2021, EL’s net sales increased 23.3% year-over-year to $4.39 billion. The company’s gross profit came in at $3.33 billion, representing a 21.7% rise from the prior-year period. EL’s non-GAAP operating income came in at $941 million, up 31.8% from the prior-year period. While its non-GAAP net earnings increased 31.3% year-over-year to $696 million, its non-GAAP EPS increased 31.3% to $1.89. The company had $4 billion in cash and cash equivalents as of September 30, 2021.

For the fiscal first quarter ended September 30, 2021, COTY’s net revenues increased 22% year-over-year to $1.37 billion. The company’s adjusted gross profit came in at $869.60 million, marking a 31.9% year-over-year improvement. Its adjusted operating income came in at $200.50 million, representing a 134% rise from the prior-year period. COTY’s adjusted net income came in at $63.1 million for the quarter, compared to a $9.8 million net loss in the year-ago period. Its adjusted EPS came in at $0.08, versus a $0.01 loss per share in the prior-year period. The company had $376.90 million in cash and equivalents as of September 30, 2021.

Past and Expected Financial Performance

EL’s levered free cash flow has increased at a CAGR of 6.4% over the past three years. Analysts expect EL’s EPS to increase 15.7% year-over-year in the current year and 14.5% next year. Its revenue is expected to grow 15.7% year-over-year in the current year and 8.9% next year.

In comparison, COTY’s levered free cash flow has increased at a CAGR of 137.7% over the past three years. COTY’s EPS is expected to grow 2400% year-over-year in the current year and 56% next year. The stock’s revenue is expected to grow 14.6% year-over-year in the current year and 6% next year. 

Valuation

In terms of non-GAAP forward PEG, EL is currently trading at 3.31x, 401.5% higher than COTY’s 0.66x. In terms of forward EV/Sales, COTY’s 2.74x compared with EL’s 6.63x.

Profitability

EL’s trailing-12-month revenue of $17.05 billion is 3.5 times COTY’s $4.88 billion. However, COTY is more profitable, with a 92.4% levered free cash flow margin versus EL’s 12.3%.

POWR Ratings

While COTY has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, EL has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

Both COTY and EL have a B grade for Sentiment, consistent with favorable analyst estimates. Analysts expect COTY’s revenue to grow 14.6% year-over-year in the current year to $5.30 billion. EL’s revenue is expected to increase 15.7% year-over-year to $7.46 billion in the current year.

COTY has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. COTY has a 1.47x forward Price/Sales, 8.5% higher than the 1.36x industry average. EL’s D grade for Value reflects its overvaluation. EL’s 6.24x forward Price/Sales is 359.7% higher than the industry average of 1.36x.

Of the 63 stocks in the A-rated Fashion & Luxury industry, EL is ranked #46, while COTY is ranked #42.

Beyond what we have stated above, our POWR Ratings system has also rated EL and COTY for Growth, Stability, Quality, and Momentum. Get all COTY ratings here. Also, click here to see the additional POWR Ratings for EL.

The Winner

Given their global brand recognition and well-established network, both EL and COTY are expected to witness high demand for their improved skin and hair care products in the near term. However, lower valuation and higher profitability make COTY a better buy here.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Fashion & Luxury industry.

EL shares were trading at $335.82 per share on Thursday afternoon, up $10.49 (+3.22%). Year-to-date, EL has gained 27.03%, versus a 23.77% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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