Estée Lauder Companies, Inc. is recommending selling shares that are currently overvalued at $82.82 based on a price target of $73, an 11.9% decrease. The company manufactures and markets high-end beauty products internationally, with strengths in brand recognition and market differentiation. However, concerns include mediocre management, inventory issues, and slower projected growth compared to competitors. Overall the recommendation is to sell shares due to largely negative stock price projections and uncertainties around sustainability of future growth.

1. Estée Lauder Companies, Inc.
Recommendation: SELL
Share Price: $82.82 (on April 19, 2015)
Price Target: $73.00 (11.9% decrease)
Names of Teammates:
Kaitlyn Cockcroft

2. 1
Executive Summary
1. CompanyDescription:EsteeLauder (EL) is a manufacturer and marketer of high
quality beauty and cosmetics products. ELutilizes a differentiation/brand strategy
business model to take advantage of its high brand recognition and knownexcellence
of products. ELis a largely international company and sales consist primarily of skin
care and makeup.
2. Outlookforthe Industry:The cosmetics industry does not highly encourage
investment, but at the same time it does not discourage investment. Many of the
industry’s profitability and valuation ratios are higher than that of the market.
However,Porter’s 5 Forces do not encourage investment, although they do not
necessarily discourage investment. There are growth opportunities forthe industry,
but the certainty of these growth opportunities is highly unknown.
3. CompetitiveAdvantagesand Sustainability: EL’sstrengths that give it a
competitive advantage in the cosmetics industry include its high quality products,
high brand recognition, international basis and grasp on market demand and
differentiation among brands. These strengths do seem tobe sustainable; however,
there are concerns over the sustainability of other strengths, particularly its
international expansion, as many of the markets it is looking to expand in are volatile
and uncertain.
4. ManagementAnalysis:EL’smanagement is not doing a remarkable job managing the
company, but ELis being managed adequately. The inventory turnover is very bad,
currently at 1.93, decreasing and below the industry average of 4. On the other hand,
net profitmargins at hovering at 11%, slightly abovethe industry average and ROE is
nearing 30%, above the industry average of 15%. Different management ratios give
varying viewson management’s job, but overall management is mediocre.
5. GrowthProspects:Infive to ten years time, EL willnot be growing as much as the
industry, according to analysts’ projections. The next five years willonly bring 9%
growth forEL, whereas the industry will grow more than 14%. In the current year, EL
is experiencing negative growth, and is projected to maintain this negative growth
through the year, although it will begin growing again within the next year. EL’s
growth prospects do not encourage investment because in the next five years, as well
as in the immediate future, EL willnot be growing as much as the industry, or as much
as competitors.
6. Valuation:ELstockis currently overvalued.We are projecting that a fairly valued
stockprice is $73 - the median of our base case projections, an 11.9% decrease from
the current $82.82 price. DCF models projected stockprices as low as $37, although
these are artificially low due to EL’s high beta of 1.26. Even when the beta was
lowered to 1.15, all of the fiveprojections still projected a decrease in price, ranging
from a 50% decrease to a decrease 15%.
We are recommending a SELLon ELstock primarily due to the largely negative stockprice
projections. Company management is of slight concern, as is the sustainability and
certainty of future growth. Decreases in institutional ownership and the high short interest
ratio also raise concerns as to the value of EL stock.

3. 2
Company Overview
Estee Lauder Companies, Inc.(EL) is a manufacturer and marketer of high-end
beauty products, notably makeup, perfume, and skin and hair care products. In 1946, Estée
Lauder and her husband, Joseph Lauder, founded EL in New YorkCity. EL went public on
November 17, 1995. Estée Lauder died in 2007, leaving the company in the hands of
President and CEO Fabrizio Freda. Freda worked at GucciSpa in the 1980s, afterward
transitioning to P&G.Freda was heavily involved in the beauty production division of P&G
and was a driving forcein the expansion and growth of the Pantene brand line. He ended his
20 year career at P&G as president of global snacks before moving to EL. Freda currently
holds nearly 1.4 million shares of ELstock (see figure one in the appendix). William P.
Lauder, grandson of Estee and Joseph Lauder, serves as ExecutiveChairman of EL.
EL utilizes a differentiation/brand strategy business model. EL has positioned itself
in the upper tier of the cosmetics industry, selling expensive products at higher end
department stores. EL has further positioned itself in the upper tier of the industry by
purchasing high end fragrance brands, including Tom Ford, Tory Burch, and Tommy
Hilfiger. Products are sold forthe most part at department stores, withincreasing sales at
travel centers.
EL does not own or lease any specific EL retail locations. However,ELis beginning
to open stores for specific brands, namely MAC, Origina, and Aveda. ELcurrently owns
nearly 1,000 stores that sell ELowned brands, as mentioned above. Productsare sold in
high-end retail stores, namely Sephora, Macy’s, Dillards, and Harrods. Some brands, such as
Tory Burch fragrances, are sold in Tory Burch retail stores as wellas department stores.
Sales also occurin salons and travel retail outlets, such as in airports. The properties that EL
owns and leases are all manufacturing, assembly, distribution, and research and
development facilities(see figure two in the appendix).
EL has the most sales in the Americas and Europe, with 42% of sales in the Americas
and 38% in Europe. However,51% of its operating income comes from Europe and only
30% comes fromthe Americas. 20% of sales and 19% of operating income is attributable to
Asia Pacific.Skin care is the highest selling product category, followedby makeup and
fragrance. Skin care makes up 43% of sales and 53% of operating income. Makeup is
responsible for 38% of sales and 39% of operating income and fragrance accounts for13%
of sales, but only 6% of operating income. The remaining sales consist of hair care and other
beauty products (see figure three in the appendix). ELhas a 5% market share in the

4. 3
cosmetics industry. L’Oreal dominates the market, with a nearly 50% market share,
followedby Unileverand P&G.
Company Management
EL has average management, with some ratios and figures pointing towards a well
managed company,and other figures pointing towards poor management, leading to the
conclusion of an averagely managed company.
Gross profitand operating profit are both trending upwards for the majority, with
gross profit reaching 80% recently and operating profit climbing to 16% in 2014. EBIT
shows the same overalltrend, increasing to 16% in 2014 from 11% in 2011. Net income has
reached $1,135 in calendar year 2014, which is 10.4% of revenues for the year. Net income
trends mirror the other trends, increasing from8% in 2011 to 11% in 2014. All of the above
ratios display an overallgrowth in earnings and income. However,most of these ratios and
figures dipped somewhat in calendar year 2014. Operating profitpercentages dropped from
16.7% in fiscal year 2014 to 15.5% in calendar year 2014. EBITexperienced the same trend,
dropping from 16.2% to 15.1% (see figure four forcommon sized income statement).
Both diluted and basic EPShave experienced growth in the past several years.
Diluted EPS has risen from $1.19 in 2010 to $3.06 in 2014. There was a drop in diluted EPS
in calendar year 2014, dropping to $2.93. Basic EPSexperienced the same pattern, raising to
$3.12 in fiscalyear 2014 and dropping to $2.98 at the end of calendar year 2014.
On the balance sheet, the rate of change of total assets differs drastically, ranging
from a 17.9% increase during 2011 to a 0.2% drop in calendar year 2014 (see figure five for
common sized balance sheet). Cash is consistently near 20% of assets, increasing nearly 9%
per year at a rather regular rate of change. Receivables accountfor 17% of assets; however,
the change in receivables ranges from a 1.4% increase to a 26.7% increase. Inventory
amounts range much the same as the other assets mentioned above.Current portion of debt
increased in the second half of 2014 because of several acquisitions ELmade. EL made these
acquisitions using debt, which is the reason forthe increase in these numbers. Long-term
debt is hovering near 17% of total assets. The yearly change in the balance of the long-term
debt accountis typically slightly negative, ranging from-0.1% to -10.4%. In 2013, the
percentage change in long-term debt was 24%. There are no drastic changes in the total
liability figures, withfigures staying in the lower50% range. The yearly change in liability
amounts remains below 10%, having many years with no significant change. EL has no

5. 4
preferred stock.Common stockand treasury stock changes Common stock amounts are
decreasing slightly tomask the exercise of options, which raises no concerns. The largest
decrease in share numbers is 1.4%, whichis slightly higher, but the yearly decrease in
shares averages at 1%, raising no concern.EL uses share repurchases and treasury stocks to
mask stockoption exercises and keep stock levels and EPSconsistent. The differencein
basic and diluted shares averages near 2% per year, raising no concern.
Goodwillstayed fairly constant from 2011 through 2014, with increases in goodwill
occurring in the second half of calendar year 2014 and in 2010. 2010 was the most recent
acquisition for EL prior to 2014, withthe acquisition of SmashBox Cosmetics. In the fourth
quarter of 2014, EL announced the acquisition of GlamGlow,Le Labo, and Rodin. These
acquisitions were made using debt and were dilutive acquisitions.
EL’s asset management ratios are mediocre and do not signal a very well managed
company. Inventory turnover is very low,dropping to 1.67 in 2014, compared to an
industry average of 4.00. There are significant concernsin regards to management’s
handling of inventory and obsolete inventory. Receivables turnover is also decreasing,
dropping from 10.4 in 2010 to 7.8 in calendar year 2014. The industry average for
receivables turnover is 10.4 and competitor P&G’s receivables turnover is 12.7. This raises
concerns forthe accounts receivableaccount and the collectability of these receivables.
Total asset turnover is abovethat of the industry average. The industry average for total
asset turnover is 0.8, P&G’s total asset turnover is 0.6, so EL is significantly above both at
1.4 (see figure six for ratios). ELmanagement is only doing a mediocre job of managing
assets, with some ratios signifying better management than others. No decisive conclusion
can be drawn based on solely these ratios.
SG&A expenses have been decreasing for the most part since 2010, although it did
increase in calendar year 2014. The SG&A expense percentage is hovering around 64%.
Although it is decreasing, it is still rather high. Gross profit margins, operating profit
margins and net profitmargins are all doing rather well, with all three margins increasing
for the most part over time and all three ratios being aboveindustry averages. These ratios
signify that management is doing a good job maintaining profitability and profit margins.
EL’s ROA is hovering around 15%, increasing yearly and abovethe industry average and
competitor’s figures. BEP is nearing 22%. BEP is higher than ROA because ROA is biased
against companies with debt, so BEP is unbiased against capital structure. ELdoes have

6. 5
some debt, although small amounts of debt, so BEP is higher. ROE is regularly near 30%,
above that of the industry, market, and competitors. ROE is well above13%, but it couldbe
artificially inflated some because ROE can be raised with debt, but ROE is not a concernat
this time. The DuPontROE is also increasing, averaging 31%. The equity multiplier is not
increasing, so the DuPontROE is increasing due to higher profit margins and asset turnover,
whichis good (see figure six forall ratios).
All of the above asset management and profitability ratios indicate that
management is doing a mediocre job managing the company. Asset management ratios do
not portray management as doing a good job; however,the profitability ratios are high, so
management is doing some things right withthe company.
Liquidity & Solvency
EL’s liquidity and solvency ratios indicate that EL is very likely to stay in business, as
it has no immediate cash problems. ELhas rather low debt levels and could easily take on
and handle more debt. EL’s current ratio is 2.35, wellabove 1.5. The quickratio is 1.81,
above the industry average of 0.5. These tworatios indicate that ELhas no immediate cash
problems that will bring into question its ability to stay in business.
EL has little debt, less than 20% of total assets on the balance sheet. EL’s total debt
ratio, debt equity ratio, and equity multiplier are all very low,meaning ELhas little debt.
The debt to equity ratio forEL is currently 0.36, nearly half that of the industry, and
significantly less than that of its competitors (see figure six forratios). EL’s TIE ratio
increases from 20 to over 30, way abovethe industry average, competitors’ TIE,and the
needed threshold of seven. This high TIE ratio means that EL is more than capable of
handling its debt and the debt’s associated interest obligations. The debt/EBITDAratio
ranges from 0 to going slightly negative at times, which is very low.EL is more than capable
of handling its debt and couldeasily take on more debt, whichcould be a good thing,
particularly forshareholders. By taking on more debt, EL wouldbe able to increase
dividends or share repurchases and have a long-term interest obligation, whichwould give
management more responsibility for the cash assets on the balance sheet.
Primary Industry Analysis
The cosmetics industry is a segment of the personal goods industry. As of 2008, the
value of the cosmetics industry was $245 billion. The most popular and widely sold items

7. 6
within the cosmetics industry include skin care and hair care, followedby makeup and
perfumes. The cosmetics industry is dominated by a limited number of large, international
corporations, including Estee Lauder, Revlon, L’Oreal, P&G and Unilever (see exhibit eleven
for further industry info and figures), whichare EL’s competitors. EL utilizes a
differentiation/brand strategy business model because its products are high-scale, high-
cost products, many bearing designer names.
EL’s ROE,ROIC, profit margin percentage, and operating profit percentage ratios are
all higher than that of the market, promoting a sustainable competitiveadvantage for EL
(reference exhibit six for ratio breakdowns). ELfalls within the top 20% of companies in
terms of profit margin percentage. EL is a company that is in the stabilization and market
maturity phase of the industry life cycle,growing slightly below the market in the future.
The personal products industry is in favorcurrently compared to the market.
Michael Porter’s 5 Forces yield the conclusion that this industry mildly discourages
investment.
1. Competition Levels: High:DiscouragesInvestment– Competition in the
cosmetics industry is rather high, particularly because there are only a small number of
large corporations that make up the majority of the market share. Net profit margin for the
industry is 10.7% and margin the market is 9%. The industry average ROIC is 16.8% and
the market average of 11.3%. Profitmargins are higher in the cosmetics industry than in
the market as a whole and ROIC is also higher in the cosmetics industry. The comparison of
market to industry in the case of these tworatios does not necessarily discourage
investment, but the levels of competition are high in the industry, particularly because of
the small number of companies that dominate the market share.
2. Threat of new entrants: Low:EncouragesInvestment– The threat of new
entrants is low in the cosmetics industry because substantial capital is needed in order to
break into the industry, creating a significant barrier to entrance. The cosmetics industry is
a capital intensive industry, with significant capital needed to continue research and
development and create new products that can keep a company competitive.
3. Threat of substitute products: High:DiscouragesInvestment– Thethreat
of substitute products is high in the cosmetics industry because there are so many brands
and so many choices. Although the industry is dominated by a handful of large corporations,
each of these corporations ownsmany brands, such as EL,whom owns numerous brands,

8. 7
such as Clinique, MAC, Tory Burch, etc. Porter’s analysis states that a low threat of
substitute products is preferable, so this factordiscourages investment somewhat.
4. Bargaining powerof customers: Medium:Neutral – Although ELis sold in
thousands of locations across the world, the majority of sales are done in department
stores. According to exhibit three, 50% of EL sales are done in both international and
domestic department stores. These 50% of sales are fairly concentrated in specific
department stores, such as Macy’s, Dillard’s, Sephora, etc. The bargaining powerof these
customers is higher than desired.
5. Bargaining powerof suppliers: Low: EncouragesInvestment– The
bargaining powerof suppliers is low.EL does not rely on any one supplier extensively, and
there is no ingredient or product that is in short supply, which couldgive a supplier higher
bargaining power.
As a whole, the cosmetics industry does seem to slightly encourage investment. The
cosmetics industry has less debt than the market and yields higher TIE ratios. Many of the
profitability ratios for the industry outperform those of the market. The cosmetic industry’s
net profitmargin averages 10.7%, compared to the market’s average of 9%. ROIC is also
higher for the cosmetics industry than for the market. The valuation ratios indicate that the
industry is currently in favorwith the market.
I believe that the cosmetics industry overalldoes encourage investment, primarily
because of its high profit margins. I believe that the cosmetics industry will experience
moderate growth in the next year, with more international growthexpected in the medium
term five-yearrange. The cosmetics industry is currently expanding into Asia, and this
expansion will continue in the immediate future, expanding the industry. In the next five
years, the cosmetics industry will be continuing to expand its presence in Asian markets, as
well as attempt to grow in the Middle Eastern markets. The cosmetics industry, ELincluded,
is projecting in the range of 5% to 10% growth, and much of this growth is coming from
expanding international markets. I have concerns as to the stability of this growth because
of the volatility of the Middle East, as well as the complexity of Asian markets. Revlon had to
pull out of China in 2014, so it is not a guaranteed growthopportunity. Cosmetics
companies willneed to adapt its products to the Asian consumer and continue to develop
new products that meet these consumers’ tastes and demands. ELis developing its water
lotions segment because Asian consumers like a lighter weight skin treatment, so ELdoes

9. 8
recognize that products must be adapted to its consumers, but the market as a wholeis still
uncertain.
I do not expect ELto significantly increase its market share in the near future. There
may be some possibility forincrease because Revlon was unable to capture the Chinese
market, so ELmight be able to increase its market share in part because of Chinese sales.
Overall, I do not expect EL to be able to significantly increase its market share. I have
concerns that EL willbe able to grow in the future, particularly at the rate in whichit and
the cosmetics industry are hoping. The quarterly breakdown of revenue and net income
(see exhibit twelve)show that from December 2013 to December 2014, there was minimal
change in any of the key categories and ratios, signifying minimal change and growth
overall forthe company,particularly because these quarterly trends give a more accurate
picture as to the year to year growth experienced.
The cosmetics industry does not highly encourage investment, but at the same time
it does not discourage investment. Many of the industry’s profitability and valuation ratios
are higher than that of the market. However,Porter’s 5 Forces does not encourage
investment, although at the same time it does not necessarily discourage investment. There
are growthopportunities for the market, but the certainty of these growth opportunities is
highly unknown.
Competitive Advantages
Some of EL’s strengths are that it is a high quality cosmetics brand, and the brand is
highly recognizable as a high end cosmetics brand (see exhibit thirteen forfull SWOT
analysis). EL has a strong international basis, with over half of all sales occurringabroad,
particularly in Asia and Western Europe. Thus far, ELhas been able to capitalize on
international growth, showing success in Asia and South America. This success can be seen
in its financial statements. The European market makes up 38% of sales and 51% of
operating income. This differencein sales and operating income percentages can be
attributes to differing costs of products – Europeans tend to purchase higher prices
products and brands from the Estee Lauder line.
Another one of EL’s strengths is its grasp on market demand and differentiation
among brands. EL owns27 brands excluding the Estee Lauder brand and each of these
brands targets a slightly different market segment. The Estee Lauder brand is a more costly
brand and is thought of typically being used by older women. Smashbox and MAC cosmetics

10. 9
brands are less costly options and are used by younger, more fashionable consumers. EL
owns so many brands withdifferent target markets that EL is able to attract a variety of
consumers with differentneeds and different budgets. This strength makes ELunique from
its competitors because EL is able to attract so many potential customers.
EL’s competitive advantages do, for the most part, seem sustainable. ELwill remain
a high-end cosmeticscompany with superior brand recognition, making its moat quite wide.
Estee Lauder is a highly known name in the beauty industry, as are many of its subsidiaries.
Concerns do arise from EL’s international advantage because there is uncertainty and
volatility in numerous markets EL is looking to expand to, withthis expansion constituting a
significant portion of its future projected growth.
EL does have several strengths that give it a competitive advantage within the
cosmetics industry. These strengths do seem to be sustainable; however,there are concerns
over the sustainability of some strengths, particularly its international expansion, as many
of the markets it is looking to expand in are volatile and uncertain. Overall, ELhas
competitive advantages that are unique fromits competitors.
Accounting Issues
There is no evidence of any financial problems or required restatements of financial
documents. EL’s financial statements appear legitimate and reliable. There are no concerns
regarding the relationship between cash flowsand accounting numbers. Net income for
calendar year 2014 was $1,135 and cash flowsforthe same time period were $1,747. Cash
flowsare higher than net income, giving investors confidencein the legitimacy of the new
income numbers, as net income is easier to manipulate the cash flows.
Share Repurchases,Options, & Dividends
EL does not have a large options program. The percentage difference between
diluted and basic shares outstanding, whichcan be highly attributed to options programs, is
hovering around 2%. There is no concernthat management is taking toomuch from
shareholders. ELis repurchasing shares and treasury share dollars are changing as well.EL
is utilizing a combination of share repurchases and treasury shares to mask stockoptions.
The repurchasing of shares is attributable to ELcovering up the effectsof stockoption
programs. EL’s options program, as wellas share buybacks,encourages investment.

11. 10
The dividend yield forEL is rather low at 1.2%, and the DPRratio is also rather low
at 29%. The low dividend yield could potentially discourage particular investors,
specifically the elderly, who live off of dividends. However,the DPRratio is low,indicating
the current dividends are stable and likely to increase, whichdoes seem true as the past five
year dividend growthpercentage is 29%. Currently, the dividends of ELmildly encourage
investment because they have no significant problems and potential for growth. However,
one concern is that during 2011, dividends were cutby over half, and after much research
and analysis of the financial statements, no clear reasoning can be found for this dividend
decrease, whichdoes raise concerns.
Insider & Institutional Ownership
The current levels of insider and institutional ownership do not pose great concern
for investors; however,the recent changes in these levels raises considerable red flags in
regards to EL stock.EL’s insider ownership currently stands at 2.97%, whichis a good
amount because it gives employees skin in the game, but not so much so that they cannot be
removed from the company. However,as shown in exhibit seven, there are numerous
transactions that have occurred in the past six months in whichELmanagement sold their
stock.The insider selling of stock,non option related stock sales, is a concern because
management knowsa company best. For management to sell their stocks signals to
investors that management does not even want to keep their ownership in the company, a
very bad sign to investors. In exhibit seven, there are no recent insider non-option
purchases shown, yielding the conclusion that management feels the stockis overvalued.
Although insider ownership is reported at 2.97%, the Lauder family holds nearly 90% of all
EL stock,a concern because of their powerover the company and overmanagement.
Institutions currently own90.1% of EL stock,which is a decrease of 4.98% from
2013. Although the institutional ownership percentage is within the acceptable range, the
drop in institutional ownership is a concern. Institutions think that ELstock willnot
perform with the market, but perform less than the market, whichis why they are selling.
Insider and institutional ownership is a concern forEL stock,signaling that the stock
may be overvalued and discouraging investment. Top levelmanagement are selling their
stockbecause they likely feel as though it is overvalued,and institutions are no longer
keeping such large stakes in EL stockbecause they do not think it willperform as well as the
market. Insider and institutional ownership discourages investment.

12. 11
Key Risks
EL currently faces currency risks associated withboth Europe and South America.
The Euro is performing poorly right now, and foreign currency exchange risks are a risk
that EL is constantly faced with. In addition to European and Asian currency exchanges,
Venezuelan inflation and controlson currency exchange forcedEL torecord a $38.2 million
charge on its balance sheet to revalue assets.
Considerable portions of ELbusiness is already conductedoverseas, with America
only constituting 30% of net income (see exhibit three). The majority of EL’s future growth
and expansion plans will be conducted overseas, including expanding its presence in the
Asian markets as wellas growing in the Middle East. Both of these geographic regions are
unpredictable regions and do not leave the investor confidentin future growth. The Middle
East is a politically unstable area and growing operations in the Middle East could be costly,
particularly if ELwill have to pay bribes and excessive fees to corrupt governments in order
to operate. The Asian market is also a dangerous market, although ELhas shown signs of
succeeding thus far in the market. Revlonhad to pull out of the Chinese market in 2014, so
EL must continue to innovate and adapt its products to fit the tastes of the Asian consumer.
As discussed with Michael Porter’s 5 Forces, EL is rather concentrated with a small
number of retailers. Becoming too concentrated witha single retailer is a significant risk for
EL, as well as increasing the bargaining power of customers. Any disruption in production
or distribution to these large retailers is another key risk for EL,as it is a manufacturer and
seller of cosmetics. Any disruption in either of these processes could costthe company time,
money, and potentially customers.
During the fourth quarter of 2014, ELacquired GlamGlow,Le Labo, and Rodin.
These are the first acquisitions forthe company since 2010. These acquisitions are all very
recent, so these acquisitions have not yet proven to be success or not. However,acquisition
risk is a key risk for EL.Acquisition risk is also a factorin terms of international expansion
for the company.
Lauder family influence is a key risk for EL.The Lauder family owns nearly 90% of
all EL stock,giving them significant influence over the company and company management.
The family owns 86.7% of stockand there are three Lauder family members on the Board of
Directors. ELis essentially at the whim of the Lauder family, whichcould be a huge risk for
the company.

13. 12
EL does have one pending litigation case as of the end of calendar year 2014.
Darphin Corporations has sued EL, claiming that Darphin is owed more money, as part of
the sale of Darphin to EL. Potential litigation is a concernfor EL,primarily in regards to its
product safety. A key risk forEL is the potential fora dangerous product, one that harms
consumers.
EL has several key risks, including international risks and international exchange
fluctuations, acquisitions risks, Lauder family ownership, and litigation. The high levels of
Lauder family ownership is one of the largest risks, as well as EL’s involvementin
international markets and the volatility of said markets.
Additional Information
EL has a current cash per share of 3.63. Cash per share has grown at a rate near
15% per year for the past several years, whichis encouraging to investors because it
indicated dividend growth potential.
EL’s short position is of some concernand mildly discourages investment. The short
interest as a % of float is 2.7%, whichis within the 2-3% acceptablerange. However,the
short interest ratio is 3.5, above the preferable 2-3 range. Although it is not above 5, which
is cause for significant concern, this is a red flag because a high short interest ratio indicates
that professionals are betting the stock price will fall.
The most recent quarter, quarter fourof calendar year 2014, shows a change in
some trends, primarily due to the acquisitions that took place. EL acquired three companies
during this quarter of 2014, having not acquired any companies since 2010. From quarter
three to quarter four of 2014, numbers did increase, including profitmargins, and expense
margins decreased. This is to be expected, as EL is a cyclicalretail company,with a majority
of sales coming in quarter four. When compared to quarter four of 2013, there is nearly no
change. Net profit margins did not change at all from quarter fourof 2013 to quarter four of
2014. This is a concern and could lead to an investor being discouraged because looking at
quarterly trends is one of the best waysto gauge accurate growth, and these quarterly trend
analyses indicate that limited growthis occurring.
GrowthProspects
In fiveto ten years time, EL willnot be growing as much as the industry, according
to analysts’ projections. The next fiveyears will only bring 9% growth forEL, whereas the

14. 13
industry will grow more than 14% (see exhibit twelve).In the current year, EL is
experiencing negative growth, and is projected to maintain this negative growththrough
the year, although it will begin growing again within the next year or more. Sales have
increased from 2011 to 2014, although sales decreased by 0.2% in calendar year 2014. Net
income displays the same trend, increasing nearly 20% per year, until calendar year 2014,
when net income dropped 6%. Analysts are projecting that sales will increase nearly 5%
again next year, although sales willcontinue a negative growth pattern for the remainder of
the year. EL’s competitor,Coty, has also experienced negative sales trends this year, but
Coty is projected to increase sales overall by 15% this year, compared to EL’s negative sales
trend this year. EL’s growthprospects do not encourage investment because in the next five
years, as well as in the immediate future, ELwill not be growing as much as the industry, or
as much as competitors.
Valuation
The valuation ratios forEL stockconclude that the stockis currently in favor.The
P/E ratio is 26.0. The industry average is 21.1 and the market average is 19.0. The forward
P/E for ELis 29.7, meaning that more growth is expected in the coming years. The P/CF
ratio is not in favor.EL’s P/CF ratio is 24.4 and the industry is 37.1, although it is in favor
compared to the market, which has a 23.3 P/CF ratio. The P/B ratio is in favorcompared to
the market and industry. The P/S ratio is in favorto the industry (see figure eight for
valuation ratios).
Three out of the four valuation ratios are in favor,signaling that the stockis in favor.
The P/E ratio is quite in favor,being 26.0 compared to the industry average of 21.1 and the
market average of 19.0. The current P/E is 23% above industry average and 37% above
market average. The P/CF ratio is 34% below the industry average and 5% above market
average. The P/B ratio is 54% above industry average and P/S is 25% industry average. EL
stockis highly in favorwith the market, which discourages a buy recommendation.
StockPrice Projections
Based on several methods of stockprice projection,the projected ELstock price is
$73, an 11.9% decrease from the current stock price (as of 4/19) of $82.82. Of the five
different projection methods used, the twoDCF methods yielded the lowest projected stock
prices. The DCF Equity model projected a $44 stockprice and the DCF Enterprise projected

15. 14
a $37 stock price. The DCF Equity model is projecting a 47% decrease in price and the DCF
Enterprise model is projecting a 55% decrease in stock price (see exhibit nine for all stock
projection models). One item to note with the DCF models it that EL has a high beta, 1.26, so
the DCF projections willbe artificially low due to the high beta.
The three multiples models used yielded higher projected stock prices, although
most projections still call for a drop in stockprice. The P/E model projected a $73 stock
price (including cash), for an 11.9% decrease in price. The P/FCF model projected a $78
stockprice fora 5.8% decrease in price. P/S was the only model to project an increase in
stockprice, a projected price of $84 fora 1.4% increase.
The base case projections, as described above, using the beta of 1.26, yielded an
average projected stockprice of $73, an 11.9% decrease fromthe current price (reference
exhibit ten for sensitivity tables). Using the DCF projection models and analyzing stock
projections based on optimistic and pessimistic cases, the stockprice ranged as low as $38
to as high as $61. Although an optimistic case was analyzed, with growth increased
substantially, stockprojections only rose to $61under the DCF model. Using a midpoint
beta of 1.150 in the stockprojection models, stockprices still showed a significant decrease,
with the projected price being $53.
Nearly every single stockprice projection, using several different models and
varying growth rates and betas, shows a significant decrease in EL stockprice. The
significant decreases in stock price signify that the stockis currently overvalued.
Conclusion
Our recommendation forEL stockis a sell because of several key factors,some of
whichare detailed in the below pros and cons list, with cons greatly outweighing pros.
Management is doing a mediocre job managing the company,with profitability ratios
looking good overall, but inventory turnover cannot be ignored. In the current year, EL is
experiencing negative growth, and is projected to maintain this negative growththrough
the year, although it will begin growing again within the next year or more. EL’s growth
prospects do not encourage investment because in the next fiveyears, as well as in the
immediate future, EL will not be growing as much as the industry, or as much as
competitors. EL is in favorwith both the market and the industry, as seen with the valuation
ratios. ELstock is highly overvalued, having a current stockprice of $82.82; however,using
several projection models and variations of such models, $73, an 11.9% decrease from

16. 1
current stock price, is a fairly valued price forEL stock.We predict that soon the market will
realize ELstock is overvalued and stock price will decrease, propelling our sell
recommendation.
Pros:
 Good valuations ratios
 Good profitability ratios
 Global expansion plans
5

17. 1
Sources
1. Elcompanies.com
2. Wikipedia.com
3. esteelauder.com
4. http://atlas.equilar.com/wa/app/wealth_details.jsp?executiveId=672604
5. http://www.bidnessetc.com/subindustry/cosmetic/overview/
6. http://atlas.equilar.com/wa/app/wealth_details.jsp?executiveId=672604
7. Finance.yahoo.com
8. http://www.forbes.com/sites/greatspeculations/2015/01/05/reasons-behind-
estee-lauders-sudden-acquisition-spree/
9. http://brandongaille.com/26-cosmetics-industry-statistics-and-trends/
http://en.wikipedia.org/wiki/Cosmetics#Cosmetic_industry
10. http://www.gurufocus.com/term/per%20share_freecashflow/EL/Free%2BCashflow
%2Bper%2BShare/Estee%2BLauder%2BCos%2BInc

18. 2
Exhibits
1)
Fabrizio Freda, CEO – Estee Lauder stock ownership
Freda owns, according to this chart, 1,392,543 shares of EL stock, including
stock held, exercisable and unexercisable options. The total of this stock is
$70,772,368.

19. 3
EsteeLauder Locationsby
Region
Number
Owned
Number
Leased
Percent
Owned
Percent
Leased
The Americas 4 8 33% 67%
Europe, Middle East & Africa 4 6 40% 60%
Asia Pacific 0 7 0% 100%
Total 8 14 36% 64%
2) Estee Lauder manufacturing/distribution/etc. locationsby
region

20. 4
3) Estee Lauder sales breakdown by productand
region/location

21. 5
4) Estee Lauder common sizeIncome Statement

22. 6
5) Estee Lauder Common SizeBalance Sheet

23. 7
6) Calculated Ratios, includingliquidity/solvency, asset
managementand profitability

24. 8
7) Insider Ownership and Transactions Summary

25. 9
8) Calculated Valuation Ratios

26. 10
9) Stock Price Projections
DCF-Equity model projection
*Note that both DCF Equity and Enterprise projected stock prices will be low
because EL has a high beta
DCF-Enterprise model projection

27. 11
Price/Earnings Model Projection
Price/Free Cash Flow Model Projection

28. 12
Price/Sales Model Projection

29. 13
10) Stock price sensitivity tables

30. 14
11) Cosmetics industry statistics and figures
Skin and hair care make up
nearly 50% of the
cosmetics market, followed
by makeup and perfume.
Asia Pacific and Western Europe are the largest markets for
cosmetics. In the coming years, Asia and S. America are expected to
experience significant growth.
Growth is also expected in the
Middle East in the coming years,
as well as Asia. Cosmetics
companies will have to
customize their products to these
consumers’ demands, as well as
stay afloat in competitive and
volatile regions.

31. 15
12)Growthprojections
Taken from finance.yahoo,in the long term, EL willgrow less than the industry, and has
seen decreases in growthin this year thus far, and is projected to see more decreases in
growth through the rest of the year.

32. 16
13)SWOT Analysis
iation