We think that Estee Lauder (NYSE:EL) currently is a better pick compared to Procter & Gamble (NYSE:PG). EL stock trades at about 40x trailing earnings, slightly higher than PG, whose P/E multiple stands at 35x. Further, EL has a P/EBIT ratio of 33x, higher than PG’s 25x. Does this gap in the companies’ valuations make sense? We don’t think so. While PG benefited more than EL during the pandemic, due to its diversified business, demand for EL’s products has taken off since economies started opening up worldwide. This is evident from the revenue trend for both companies. PG saw revenue rise from $67.7 billion in FY ’19 (the pre-pandemic fiscal year, ending June ’19), to $71 billion in FY ’20, and has since risen to $76.1 billion as of FY ’21. On the other hand, EL saw revenue drop from $14.9 billion in FY ’19 to $14.3 billion in FY ’20, but has since jumped as high as $16.2 billion as of FY ’21.
Having said that, there is more to the comparison, which makes EL a better bet than PG, especially at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Procter & Gamble vs Estee Lauder: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Estee Lauder Is The Clear Winner On Revenue Growth
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PG has seen revenue steadily rise from $65.1 billion in FY ’17 to $76.1 billion on an LTM basis, a rise of almost 17%. In comparison, EL’s revenues have risen from $11.8 billion to $16.2 billion over the same period, a jump of more than 37%. Additionally, in terms of post pandemic recovery, EL has outperformed PG again, with revenues rising from $14.3 billion in FY ’20 to $16.2 billion on an LTM basis (a rise of 13%), compared to PG’s revenues which rose from $71 billion to $76.1 billion over the same period (a rise of only 7%).
While PG is a larger company, with 4.5x times EL’s revenues, EL has seen better revenue growth since FY 2017.
2. Estee Lauder Edges P&G On EBIT Margins
Procter & Gamble saw margins drop from 29% in FY ’17 to 8% in FY ’19, due to foreign currency headwinds and increasing competition in emerging markets. However, margins rose again to 22% in FY ’20, before dropping to 17.9% on an LTM basis. On the other hand, EL saw a steady rise in margins from 14.3% in FY ’17 to 16% in FY ’19, before dropping to 8.1% in FY ’20. However, EL’s margins have since surged to 21.3% as of FY ’21.
Estee Lauder has seen stronger EBIT margin growth than PG, and its margins currently stand at 21.3%, higher than PG’s 18%.
3. Estee Lauder Is Also In A Better Net Cash Position
EL’s debt-to-equity ratio currently stands at 5%, lower than Procter & Gamble’s current debt-to-equity ratio that stands at 9%. Additionally, EL’s cash-to-assets ratio currently stands at 22.6%, more than 2.5x higher than Procter & Gamble’s 8.6%.
The Net of It All
While PG’s revenues are larger than that of Estee Lauder, the latter has a higher EBIT margin and has seen higher historical revenue growth. Our comparison of the post-Covid recovery above, also shows that EL has been performing better than PG lately. Finally, despite EL having a higher P/S ratio (at 7x) and higher P/E ratio (at 40x), compared to PG (4.6x and 35x respectively), we believe Estee Lauder’s strong financials could lead to this gap widening. As such, we believe that Estee Lauder is currently a better bet compared to Procter & Gamble stock.