Can Estee Lauder rise more after upbeat view?

By Jessica Wohl

CHICAGO, Oct 27 (Reuters) - Estee Lauder Cos Inc's (EL.N) recent upbeat forecast could be much more than cosmetic.


Estée Lauder

Estee Lauder is due to report financial results on Friday 30 October and has already pleased investors by saying its first-quarter profit will be significantly higher than thought.

The cosmetics maker also plans to raise its 2010 forecast when it reports earnings, although it has a cautious take on economic recovery and consumer spending.

Some of the upside came from its sales at duty-free shops, growth in Asia and strong interest in new products after a year of consumer belt-tightening. But tight cost controls and the improved foreign currency translation also helped, while holiday season orders arrived a quarter earlier than anticipated.

Estee Lauder shares have risen about 6 percent since it issued its positive assessment on Oct. 16. The company has a higher price-to-earnings ratio than other cosmetics makers such as Avon Products Inc (AVP.N) and Elizabeth Arden Inc (RDEN.O).

Will an uptick in travel and early holiday demand spell relief? Or are consumers keeping a lid on spending heading into the winter? Could fears over the H1N1 flu virus put more pressure on sales?

ROSY VIEW

"The environment's only still getting better, especially with the continued weakness in the dollar. That's helping them even further," said Wedbush Morgan analyst Rommel Dionisio.

"Retailers have really narrowed the number of SKUs (specific items) and vendors that provide prestige cosmetics and fragrances in the sector and so the bigger stalwart companies like an Estee Lauder certainly benefit from that reduced competition."

Dionisio, who rates Estee Lauder "outperform," raised his price target by $5 to $48 after the Oct. 16 announcement.

He said destination travel has come back a little bit, which helps Estee Lauder and other cosmetics makers that derive a good chunk of their profits from duty-free shops.

"I wouldn't say the retail environment is robust yet, certainly. There's still room for improvement there ... They've done well even despite the environment not even being that particularly robust yet."

TOO EARLY TO SHINE

In August, Estee Lauder forecast fiscal-year earnings of $1.55 to $1.70 per share. Analysts are now calling for a profit of $1.79, up 10 cents since the company's preview.

Bill Pecoriello, chief executive of Consumer Edge Research, said Estee Lauder could raise its forecast by about 10 cents to 15 cents per share, as foreign currency translation could add about 10 cents this year. He said travel retail shipments likely added about 5 cents to 6 cents to the first quarter.

"Whether they go up beyond that on the full year is how they feel about the underlying business," he said.

"We think with the valuation right now, the market's baking in a lot more than 10 to 15 cents," said Pecoriello, who has a "neutral" rating on Estee Lauder.

Pecoriello prefers Avon in the cosmetics space. He expects organic sales to rise 6 percent to 7 percent over the next couple of quarters at Avon and projects 3 percent growth in such sales at Estee Lauder.

"Avon is a play on more value beauty, not high end beauty in the department store channel, which is struggling. So that's our preferred name in beauty right now." (Reporting by Jessica Wohl; editing by Michele Gershberg and Andre Grenon)

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