Zacks' Cosmetics Industry Stock Outlook: Shine On

The cosmetics industry is likely to keep its shine on, given strong demand for skincare products, which account for a significant chunk of cosmetic sales. Apart from skincare, the cosmetics space is also poised to gain from strength in the hair care category, along with improved trends in makeup and fragrance businesses. Notably, the global prestige beauty industry is anticipated to grow nearly 7 percent in fiscal 2018.

Cosmetic players are set to continue gaining from their solid efforts comprising effective promotional and marketing strategies to keep pace with the evolving consumer trends and shopping patterns. Moreover, they remain focused on undertaking prudent buyouts, while they also remain committed to strengthen digital operations to cater to the rising demand for online shopping.

Of late, the market has witnessed a shift in consumer preference with more and more people opting for natural and organic beauty products and anti-aging products.  To this end, companies in the cosmetics space remain focused on innovations and new product launches.

The cosmetics industry is under the purview of FDA regulations, which may put limitations on adulterated or misbranded cosmetics. Also, intense competition and soft brick-and-mortar traffic in North America are concerns for some cosmetic industry players. Nonetheless, vast international presence remains a driving factor, though any tariffs on Chinese imports are likely to weigh on beauty and personal care categories.

Further, a strong travel retail network is acting as a tailwind for the cosmetics industry. Markedly, beauty accounts for a considerable portion of travel retail sales that have been growing over the last many years, courtesy of increased travel around the Asia-Pacific region. These factors, along with a favorable economic scenario should keep the performance of cosmetic players going amid hurdles like increased supply-chain costs and investments associated with innovations and marketing.

The Industry Outperforms

Constant efforts to enrich consumers' experiences, along with rising demand for skin care as well as anti-age products have been driving the performance of a sizeable number of stocks in the space.  This clearly seems to be a treat to investors as evident from shareholder returns in the past year.

The Zacks Cosmetics Industry within the broader Zacks Consumer Staples Sector has outperformed both the S&P 500 and its own sector over the past year.

Positive indications about the global prestige beauty industry, solid M&A activities and robust digital operations should help cosmetic stocks generate positive shareholder returns in the near future. However, softness across the global mass beauty market and intense competition may weigh on investor sentiment.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and its aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

This becomes even clearer when we focus on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the loss per share estimate of $1.53 for the industry for 2018 is not the actual bottom-up dollar estimate for every company in the Zacks Cosmetics industry, but rather an illustrative aggregate created by our proprietary analytics model. The key factor to keep in mind is not loss of $1.53 per share of the industry for 2018, but how this estimate has evolved recently.

Bottom Line

Though the industry's valuations appear cheap for the near-term, solid runs could soon make some stocks pricey. Investors should closely evaluate the long-term expectations and look for some good entry points in the stocks that will help them to make the most of the momentum in the industry.

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