The Top-Line Growth Story For E.L.F. Is A Thing Of Beauty

Morgan Stanley has started coverage of e.l.f. Beauty Inc ELF with an Equal-Weight rating and $28 price target, as it believes the company’s growth potential is already priced in to its valuation.

The brokerage expects revenue growth of 19 percent CAGR between 2015 and 2020, driven by conservative estimate of 7 percent revenue growth from new stores in 2016–2018.

“Key drivers of ELFs revenue growth outlook (off its still small — $190 million base in 2015) include: (i) continued success in its core US mass cosmetics (ex-nail) market (~$7.3 billion) driven by shelf space expansion at existing national accounts, penetration of new accounts, and further expansion of ELFs company owned store base,” analyst Dara Mohsenian wrote in a note.

Related Link: In The Beauty Industry, E.L.F. Is Looking Attractive

Another driver is expansion into larger white space areas, including U.S. mass skin care (about $11.4 billion) and international mass cosmetics (about $25 billion).

Further, Mohsenian expects gross margins to expand about 175 bps in 2015–2020, helped by favorable price/mix, and to a lesser extent, cost savings from sourcing.

However, the analyst believes ELF is a high-risk story, given its small size and concentrated retailer base as 28/23 percent sales mix exposure to Target Corporation TGT /Wal-Mart Stores, Inc. WMT creates volatility.

“That said, we view risks vs our model as more to the upside than downside, given myriad growth opportunities where we believe we are conservative with our forecast, including new store wins or success in the skin care segment,” Mohsenian noted.

At the time of writing, shares of e.l.f. were up 0.82 percent to $27.20.

Full ratings data available on Benzinga Pro.