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Jefferies Sees Beauties And Beasts In The Modern Cosmetic Space

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Jefferies Sees Beauties And Beasts In The Modern Cosmetic Space

Jefferies initiatedcoverage of several companies in the modern cosmetic space, assigning Buy ratings to Ulta Beauty Inc (NASDAQ: ULTA), e.l.f. Beauty Inc (NYSE: ELF) and Estee Lauder Companies Inc (NYSE: EL). Meanwhile, Prestige Brands Holdings, Inc. (NYSE: PBH), Sally Beauty Holdings, Inc. (NYSE: SBH), Coty Inc (NYSE: COTY) and Inter Parfums, Inc. (NASDAQ: IPAR) were rated Hold.

Ulta Beauty: Compelling Way to Play Superior Growth Rate

Analyst Stephanie Wissink sees Ulta Beauty as the best way to play mid-single-digit, or MSD, rate of change in beauty category. The analyst thinks the company's shares offer a compelling way to play the superior rate of growth in beauty – across brands, categories and applications.

The analyst reasoned that the high valuation reflects growth scarcity and outstanding execution. On top of the $9.80 per share in earnings per share Jefferies models for 2019, it sees $3-$5 in annual CRM monetization value potential. The firm also pointed out that the company's 20+ percent organic growth is meaningfully better than the industry's 4 percent growth.

"Traffic counts continue to drive nearly 75 percent of comp sales value — a trend we expect to continue. ATV (brand mix and services) is a strong secondary lever," the analyst added.

E.l.f. Beauty: Compelling Sales Growth & Superior Margins

Jefferies thinks e.l.f. Beauty is among few SMid cap ways to play MSD+ beauty category growth, with the company offering superior 22 percent EBITDA margin profile for its size.

Additionally, the firm said the company has compelling and clear 20%+ sales growth drivers. Brand equity is building virally and on digital platforms, while M&A backdrop is a backstop, the firm said.

Favoring Estee Lauder's Organic And Inorganic Growth

Wissink said she favors Estee Lauder's organic and M&A-complemented growth, with value unlock initiative leading it forward. While the analyst sees limited multiple expansion, she bets on earnings and sales upside for the company.

Jefferies believes capital efficiency mandate is driving Estee Lauder forward. Notwithstanding the recent appreciation in shares, the firm still sees the shares as offering value over the next one to two years.

Coty's Earnings & Sales Variability Justify Discounted Valuation

Jefferies is of the view Coty's sales and earnings variability over the next one to two years following its merger with Procter & Gamble Co (NYSE: PG)‘s specialty beauty business in the second half of 2016 justifies discounted multiple.

The firm feels the consumer segment, which is lagging, would be the stock driver. That said, the firm holds the view that weakness would prolong the time it will take the company to reach its earnings per share target and would weigh on confidence. Additionally, the firm believes fundamentals would remain volatile.

Prestige Brands: Organic And Deleverage-Driven Near Term

Jefferies termed Prestige Brands as a leading niche brand development company in the low-single digit consumer products healthcare category. The firm said it favors shift toward higher growth OTC and daily use areas. While noting that organic growth is trending around 2–2.5 percent, the firm said acquisitions too are helping.

However, the firm sees volatility in the legacy business.

Cautious On Sally Beauty's Long Term

Jefferies expressed caution regarding model structure, store densities, rising labor costs, and competition in the long term. The firm feels structural issues require time and capital to address. The firm made a mention of disintermediation risk, as productivity declines and sales quality worsens.

Meanwhile, the firm sees near-term offsets from cost restructuring, price increases, and vendor discounts. That said, the firm indicated that comps is moderating and that the bulk of the earnings per share growth in the past came from share repurchases.

Inter Parfums Fairly Valued For Current Risk-Reward

Jefferies initiated coverage of Inter Parfums at Hold. The firm believes the stock is fairly valued for current risk-reward. Though it sees improvement in the financial profile, the firm said 2017 includes difficult compares which may handicap the multiple & earnings per share near term.

Ratings/Price Target

  • Ulta Beauty: Raised to Buy from Hold/Hiked to $350 from $266.
  • E.l.f Beauty: Initiated at Buy/$30.
  • Estee Lauder: Raised to Buy from Hold/Lifted to $110 from $95.
  • Coty: Hold/$17.
  • Prestige Brands: Raised to Hold from Underperform/Lifted to $54 from $45.
  • Sally Beauty: Initiated at Hold/$18.
  • Inter Parfums: Initiated at Hold/$35.
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