KeyBanc: E.L.F. Beauty Is Attractive, But Shares Are Too Pricey

Cosmetics company e.l.f. Beauty Inc ELF has managed to mesmerize an analyst at KeyBanc Capital Markets on all counts but its valuation.

The Analyst

KeyBanc Capital Markets analyst Jason Gere initiated coverage of the e.l.f Beauty stock with a Sector Perform rating and no assigned price target. 

The Thesis

ELF, which targets millennials, is a disruptor focusing on innovation and quality, with the cost competitiveness of its products being an added advantage, Gere said in a Wednesday note. (See the analyst's track record here.) 

The company is competing in the attractive beauty market and is likely to grow faster than the industry, Gere said.

"ELF's ability to disrupt the industry with highly innovative products at a lower price through multiple channels gives it an advantage over legacy brands," Gere said. 

The features that add to the stock's investment appeal are, according to Gere: 

• Appeal across social media, creating brand awareness.
• A multichannel approach.
• Innovative products offered at affordable prices.
• Margin expansion opportunity through volume growth.
• Strong management and ownership.
• M&A premium afforded for the company.

But KeyBanc sees the competitive environment within the cosmetics space; the possibility of a 20-percent shortfall relative to the revenue guidance on ELF's potential inability to capture incremental square footage; and limited flexibility to achieve scale and rich valuation as risks.

The premium valuation of the shares keeps KeyBanc on the sidelines, given its belief that the stock has limited upside based on the current multiple and an anticipated sales growth deceleration ahead.

The Price Action

ELF shares are down about 20 percent year-to-date.

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