Advertisement
UK markets open in 5 hours 4 minutes
  • NIKKEI 225

    39,753.15
    -310.64 (-0.78%)
     
  • HANG SENG

    17,439.52
    +21.84 (+0.13%)
     
  • CRUDE OIL

    80.49
    +0.36 (+0.45%)
     
  • GOLD FUTURES

    2,410.50
    +11.40 (+0.48%)
     
  • DOW

    40,287.53
    -377.47 (-0.93%)
     
  • Bitcoin GBP

    52,544.35
    +388.19 (+0.74%)
     
  • CMC Crypto 200

    1,398.70
    +67.80 (+5.09%)
     
  • NASDAQ Composite

    17,726.94
    -144.26 (-0.81%)
     
  • UK FTSE All Share

    4,473.44
    -27.95 (-0.62%)
     

A Look At The Fair Value Of The Estée Lauder Companies Inc. (NYSE:EL)

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Estée Lauder Companies fair value estimate is US$132

  • Estée Lauder Companies' US$111 share price indicates it is trading at similar levels as its fair value estimate

  • Analyst price target for EL is US$150, which is 14% above our fair value estimate

How far off is The Estée Lauder Companies Inc. (NYSE:EL) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

ADVERTISEMENT

Check out our latest analysis for Estée Lauder Companies

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$934.8m

US$1.57b

US$2.02b

US$2.33b

US$2.60b

US$2.82b

US$3.02b

US$3.18b

US$3.33b

US$3.46b

Growth Rate Estimate Source

Analyst x7

Analyst x6

Analyst x4

Est @ 15.35%

Est @ 11.46%

Est @ 8.73%

Est @ 6.83%

Est @ 5.49%

Est @ 4.56%

Est @ 3.91%

Present Value ($, Millions) Discounted @ 7.8%

US$867

US$1.4k

US$1.6k

US$1.7k

US$1.8k

US$1.8k

US$1.8k

US$1.7k

US$1.7k

US$1.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$16b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$3.5b× (1 + 2.4%) ÷ (7.8%– 2.4%) = US$66b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$66b÷ ( 1 + 7.8%)10= US$31b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$47b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$111, the company appears about fair value at a 16% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Estée Lauder Companies as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 1.170. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Estée Lauder Companies

Strength

  • Debt is well covered by earnings and cashflows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Personal Products market.

Opportunity

  • Annual earnings are forecast to grow faster than the American market.

  • Current share price is below our estimate of fair value.

Threat

  • Dividends are not covered by earnings.

  • Annual revenue is forecast to grow slower than the American market.

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Estée Lauder Companies, we've put together three essential aspects you should consider:

  1. Risks: For example, we've discovered 4 warning signs for Estée Lauder Companies (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for EL's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com