Momentum’s leading stockbroking division – Momentum Securities – will be bringing you their Stock Pick of the Week, each week on a Wednesday or Thursday. The stock pick motivation is available as written content and a downloadable video and audio clip.
This week’s pick: Estée Lauder Companies
About: Estée Lauder is an American multinational cosmetics company – producer and supplier of one of the most admired skincare, makeup, fragrance, and hair care ranges. There has been a clear decline in economic activity over the past few months, and although consumers may be more strapped for cash than before, luxury brands with a loyal consumer market, like Estée Lauder, will still indulge in small luxury items - what economist call “The Lipstick Effect”, an index relating to the income effect, which is an observation and indicator of consumer demand during economic difficulty.
Portfolio Manager for Momentum Securities, Francois Strydom shares his insight on Estée Lauder Companies.
Click here to download:
• the audio clip
• the video clip.
If you had any suspicion that globally, people are buying more products of the likes of Jo Malone, MAC, Clinique, Estée Lauder, you would be 100 percent correct. In the last five years, the company that owns these products and manufactures these products only had one negative earnings surprise, in the last five years itself. And that company is none other than Estée Lauder.
Making up about three and a half percent of our global Sharia portfolio, Estée Lauder is a very vital part in our reflation trade and obviously, just looking at the share prices at the moment, the world obviously also thinks that discretionary spend, especially discreet luxury, will definitely be a continuing phase in the post Covid-19 world.
The share price itself is trading exceptionally dear level, at a 46 forward P/E, no matter that it is a quality company, only a 25 percent debt to total assets and with an open Z-Score of 6.1, means that the balance sheet of this company is in an exceptionally good state and it will probably not have any cash flow issues with its dividends and operational environment, at any point in time soon.
Just in basic terms, the share price is trading at 312 dollars per share at the moment. If I were a betting man, I would want to acquire the share price at something closer or add to my share price or my position at something closer to 255 dollars, where there was a slight gap that opened up on a technical level.
Chances are it's probably not going to get there and three and a half per cent would be a good position to hold for us. Probably even try and upweight that if we do get to the 255 dollars, but chances are slim.
And then just finally, why we continue to hold a share, even though it is trading at a fairly high forward price-to-earnings, is because it makes up about 50 percent of its revenue in the two sides of the global economy, that we feel will lead the recovery for the rest of the world. And that obviously being China or Asia, South Pacific being 30 percent of its revenue and the US being 25 percent of its revenue.
Get the latest issue of FAnews