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Cosmetics Industry Outlook: High Demand, Travel Retail Enhance Prospects

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The Zacks Cosmetics industry consists of providers of beauty and personal care products, under several luxury brands. The cosmetic industry players mainly manufacture and market skin care, fragrance, makeup and hair care products. Many firms in the space market via sales representatives, whereas some sell their products through retailers, independent and chain drug stores and pharmacies, upscale perfumeries, department stores and beauty salons, among others.

Let’s take a look at the industry’s three major themes:

  • Industry players are set to benefit from the increasing demand for skincare products, which constitute a considerable proportion of cosmetic sales. Also, solid haircare product sales and improving trends in makeup and fragrance businesses are drivers. Cosmetic players are thus looking to make the most of these trends through constant innovation, launches, buyouts and strengthening of digital operations. These, however, entail high costs.
  • A robust travel retail network acts as a major tailwind for players in the cosmetics universe. We note that beauty and fragrance account for a sizeable part of travel retail sales, which have been rising on increased travel, especially around Asia Pacific and China. Markedly, the travel retail platform helps enhance brand awareness and acceptance among customers globally.
  • Rising health concerns and inputs in the preparation of cosmetic products have drawn the attention of the Food and Drug Administration on cosmetic players, which were otherwise self-regulated for quite some time. Additionally, availability of cheaper alternatives gives rise to stiff competition in the premium segment.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #96, which places it in the top 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of an impressive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the end of January, the industry’s consensus earnings estimate for the current year has risen close to 2%.

Given the favorable prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags on Stock Market Performance

The Zacks Cosmetics industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.

The industry has gained 1.7% over this period, compared with the S&P 500’s rise of 9.7%. Meanwhile, the broader sector has risen 3.3%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 27.17X compared with the S&P 500’s 17.20X and the sector’s 18.75X.

Over the past five years, the industry has traded as high as 34.05X, as low as 19.39X, and at the median of 25.40X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Given the strength in travel retail and digital operations along with rising demand for skincare products, the cosmetic space appears radiant with prospects. To top it, efforts to empower sales leaders through improved training and technological enhancements will likely work in favor of most companies in the Zacks cosmetics industry. However, stiff competition and costs associated with new products, innovation and other sales-driving initiatives cannot be ignored.

While there are no stocks in the Cosmetics space that currently holds a Zacks Rank #1 (Strong Buy), we are presenting one stock with a Zacks Rank #2 (Buy) and two stocks with a Zacks Rank #3 (Hold) that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Estee Lauder Companies Inc. (EL - Free Report) : For this cosmetics giant, the Zacks Consensus Estimate for the current fiscal year earnings has increased over the past 30 days. This Zacks Rank #2 stock has gained almost 13% in the past year. The company has an estimated long-term earnings growth rate of 12.9%. It has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by average of 11.7% in the trailing four quarters.

Price and Consensus: EL

Helen of Troy Ltd. (HELE - Free Report) : The Zacks Consensus Estimate for this Zacks Rank #3 company has remained stable in the last 30 days. The consumer products player has an estimated long-term earnings growth rate of 5.8%. The company has an average positive earnings surprise of 16.5% for the last four quarters. Markedly, Helen of Troy has seen its shares rally close to 37% in a year.

Price and Consensus: HELE

Avon Products, Inc. AVP: This provider of cosmetics, fragrances, toiletries and accessories has an estimated long-term earnings growth rate of 7.5%. The Zacks Rank #3 company has gained roughly 35% in the past six months. The Zacks Consensus Estimate for current-year earnings has remained stable in the last 30 days.

Price and Consensus: AVP

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

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In-Depth Zacks Research for the Tickers Above

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Helen of Troy Limited (HELE) - free report >>

The Estee Lauder Companies Inc. (EL) - free report >>