Cross-Sector Comparison: Is Estee Lauder A Better Pick Over LLY Stock?

EL: Estee Lauder logo
Estee Lauder

We believe that Estee Lauder stock  (NYSE: EL) is a better pick than the pharmaceutical giant Eli Lilly stock (NYSE: LLY), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar operating income of $8-10 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Looking at stock returns, LLY stock has fared much better, with a 24% rise this year, compared to a 20% fall for EL stock and a 15% rise for the broader S&P500 index. There is more to the comparison, and in the sections below, we discuss the possible returns for Estee Lauder and Eli Lilly in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in this analysis.

1. Eli Lilly’s Revenue Growth Is Better

  • Eli Lilly’s top-line expansion has been better, with an 8.7% average annual growth rate in the last three years, compared to 6.3% for Estee Lauder.
  • Estee Lauder is an American multinational manufacturer and marketer of skincare, makeup, fragrance, and hair care products, with a presence in global markets.
  • Skin care sales are the largest contributor to the company’s net sales, bringing in 56% ($9.9 billion) of Estee Lauder’s revenues in fiscal 2022.
  • Estee Lauder has benefited from a travel recovery and opening up of economies in fiscal 2022.
  • Eli Lilly’s revenue growth has been driven by continued market share gains for drugs such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. The company also secured U.S. FDA approval for its diabetes drug – Tirzepatide – which is expected to garner over $5 billion in peak sales.
  • If we look at the last twelve-month period revenues, both have seen sales decline. Still, Eli Lilly fares comparatively better, with a 6% fall in sales vs. a 12% decline for Estee Lauder.
  • This can be attributed to a slower recovery in Asia travel weighing on Estee Lauder’s sales, while lower sales for Covid-19 antibodies weighed on Eli Lilly’s top-line growth.
  • Our Estee Lauder Revenue Comparison and Eli Lilly Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, with slowing economic growth and slower than anticipated pick-up in Asia travel, Estee Lauder’s sales are expected to see a low double-digit decline in 2023 before returning to growth in 2024 and beyond.
  • Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab – one of the most anticipated drugs with peak sales pegged as high as $10 billion. The company will likely see strong sales growth in the coming years.
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2. Eli Lilly Is More Profitable 

  • Estee Lauder’s operating margin rose from 16% in 2019 to 18% in 2022, while Eli Lilly’s operating margin rose from 22% to 25% over this period.
  • Looking at the last twelve-month period, Eli Lilly’s operating margin of 23% fares better than 11% for Estee Lauder.
  • The sharp decline in Estee Lauder’s operating margin in the recent past can be attributed to a rise in manufacturing costs.
  • Our Estee Lauder Operating Income Comparison and Eli Lilly Operating Income Comparison dashboards have more details.
  • Eli Lilly’s free cash flow margin of 23% is higher than 13% for Estee Lauder.
  • Looking at financial risk, both are comparable. While Eli Lilly’s 4% debt as a percentage of equity is lower than 10% for Estee Lauder, its 7% cash as a percentage of assets is lower than 24% for the latter, implying that Eli Lilly has a better debt position but Estee Lauder has more cash cushion.

3. The Net of It All

  • We see that Eli Lilly has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Estee Lauder has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Estee Lauder is the better choice.
  • If we compare the current valuation multiple to the historical average, Estee Lauder fares better. EL stock trades at 4.0x trailing revenues, compared to its last five-year average of 5.6x, while LLY stock trades at 15.3x trailing revenues vs. the last five-year average of 8.3x.
  • Our Estee Lauder (EL) Valuation Ratios Comparison and Eli Lilly (LLY) Valuation Ratios Comparison have more details.
  • Despite Eli Lilly’s faster sales growth expected in the next three years, Estee Lauder appears to be a better pick from a valuation multiple perspective.
  • If we consider the P/S multiple of 4.5x for Estee Lauder, lower than its historical average, its expected revenue of $19 billion in the next three years will result in a higher market capitalization of around $85 billion compared to the $71 billion currently, implying nearly 20% potential returns.
  • In contrast, Eli Lilly’s revenue will likely be about $43 billion in the next three years, and assuming its P/S multiple to be around 11x, higher than its historical average, the market capitalization will be around $473 billion, vs. $431 billion currently, implying roughly 10% gains.
  • Overall, we believe investors willing to choose between these two stocks will likely be better off buying Estee Lauder for the next three years.
  • Eli Lilly stock has seen a sharp rally in the recent past due to its promising pipeline. Even now, any regulatory approvals will likely result in even higher levels for the stock. That said, any new drug will take a few years to reach its peak sales potential. As such, valuing LLY stock two times its historical valuation multiple appears to be a stretch, and it will likely decline over time, in our view.

While EL stock looks like it can see higher levels, it is helpful to see how Estee Lauder’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Estee Lauder vs. Pool Corporation.

With inflation rising and the Fed raising interest rates, among other factors, EL stock has fallen 20% this year. Can it drop more? See how low Estee Lauder stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
YTD [1]
Total [2]
EL Return 8% -20% 161%
LLY Return 6% 24% 517%
S&P 500 Return 6% 15% 98%
Trefis Multi-Strategy Portfolio 8% 18% 270%

[1] Month-to-date and year-to-date as of 6/16/2023
[2] Cumulative total returns since the end of 2016

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