We think that Estee Lauder (NYSE:EL) currently is a better pick compared to Procter & Gamble (NYSE:PG). Estee Lauder stock trades at almost 8x trailing revenues, more than that of PG’s 5x multiple. Does this gap in the companies’ valuations make sense? We believe so and we only expect this gap to widen. While both companies have seen a steady rise in revenues since the lockdowns started being lifted, Estee Lauder has seen much stronger growth, and with demand for cosmetics back on track, we expect Estee Lauder to continue seeing faster revenue growth than PG. Estee Lauder trades at a higher P/EBIT of 35.6x against PG’s 22x but has also seen faster EBIT margin growth lately. Additionally, Estee Lauder is in a better debt position and has a stronger cash cushion.
Having said that, we dive deeper into the comparison, which makes Estee Lauder a better bet than Procter & Gamble, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Procter & Gamble vs Estee Lauder: Estee Lauder Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. Estee Lauder Ahead On Revenue Growth
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Estee Lauder’s revenues suffered in FY’20 due to the pandemic, dropping from $14.9 billion in FY ’19 to $14.3 billion in FY ’20, but as the lockdowns were lifted, EL’s sales started recovering. Estee Lauder’s sales rose from $14.3 billion in FY ’20 to $16.2 billion in FY ’21 (EL’s fiscal year ends in June), and currently stand at $17 billion on an LTM basis.
PG saw 4.8% sales growth during the pandemic, as compared to -3.8% for Estee Lauder. However, EL’s pre-pandemic sales growth stood at 11.7% vs PG’s 2.2%, and for the most recent quarter, too, EL has seen much stronger sales growth. EL’s sales for Q1 ’22 rose 11.6% QoQ and 23.3% YoY, while PG’s Q1 ’22 sales rose 7.3% QoQ and 5.3% YoY.
While PG ($77.1 billion LTM sales) is a much larger company than EL on the basis of sales ($17 billion LTM sales), Estee Lauder has seen better revenue growth than PG lately, and also before the pandemic hit.
2. EBIT margins: A Mixed Bag; But Estee Lauder Has A Better Cash Cushion
Estee Lauder’s P/EBIT ratio stands at 35.6x currently, much higher than PG’s 22x. While PG’s LTM EBIT margins currently stand at 22.9%, slightly higher than Estee Lauder’s 21.6%, Estee Lauder is ahead in terms of LTM change compared to the last three fiscal years, with 6.5% growth vs PG’s 5.1%.
Looking at both companies’ cash position, PG’s debt as a % of equity stands at 8.2%, twice that of Estee Lauder’s 4%. Additionally, Estee Lauder’s cash as a % of assets stands at 18.5%, more than double that of Procter & Gamble’s 8.7%.
3. Estee Lauder Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Estee Lauder is the better choice. Estee Lauder’s LTM revenues of $17 billion are expected to rise at a CAGR of 7.8% as per our estimates, taking revenue numbers three years out to as high as $21 billion. Assuming Estee Lauder’s P/S ratio to pull back to a conservative level of 6.5x from the current 7.7x, this still means that market cap would expand to $139 billion, an upside of 6%.
In comparison, given historical trends, we expect Procter & Gamble’s sales to rise at a CAGR of just 1.9%, taking revenue in three years to $82 billion. Considering the P/S for Procter & Gamble to also pull back to 4.7x, we estimate a market cap of $385 billion for PG, indicating a downside of around 3%.
The Net of It All
Despite Procter & Gamble’s revenues being larger than that of Estee Lauder, the latter has seen faster EBIT margin growth and is in a better financial position. Further, our comparison of the post-Covid recovery above, shows that Estee Lauder has shown a much stronger growth than Procter & Gamble. Despite EL’s higher P/S ratio of 7.7x, compared to Procter & Gamble’s 5.1x, we believe that this gap in valuation could widen further. As such, we believe that Estee Lauder stock is currently a better bet compared to Procter & Gamble stock.
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|S&P 500 Return||0%||25%||109%|
|Trefis MS Portfolio Return||-1%||42%||282%|
 Month-to-date and year-to-date as of 12/17/2021
 Cumulative total returns since 2017