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Cosmetics Industry Outlook Prospects Dimmed by Coronavirus Woes

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The Zacks Cosmetics industry includes providers of beauty and personal care products. Players in the industry 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:

  • The coronavirus outbreak has dealt a major blow to the cosmetics space. Several companies are bearing the brunt of the temporary closure of brick and mortar stores, reduced store traffic along with limited hours of operation. Apart from this, some cosmetic companies are delaying product launches, given the current situation and chances of it lingering in the near term at least. To top it, increased travel restrictions have hit the travel retail network hard, which plays a vital role in boosting the top line of most cosmetic players. The uncertainty surrounding the duration and severity of COVID-19 keeps the cosmetics space under pressure, though strength in online operations and store re-opening in some regions are likely to offer some respite.
  • Availability of cheaper alternatives gives rise to stiff competition in the luxury segment. Apart from this, wide international presence exposes cosmetic industry players to volatile currency movements. Additionally, rising health concerns and inputs in the preparation of cosmetic products have drawn the attention of the FDA on cosmetic players, which were otherwise self-regulated for quite some time.
  • Favorable demand for skincare products (which constitute a considerable proportion of cosmetic sales) has been a driver. Cosmetic players are focused on making the most of such trends through focus on innovation, contribution from buyouts and strengthening of digital operations. However, these entail high costs.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #155, which places it in the bottom 39% 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 solid 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the end of February 2020, the industry’s consensus earnings estimate for the current year has slumped 46.2%.

Despite the drab 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 Outpaces Stock Market Performance

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

The industry has declined 28% over this period against the S&P 500’s growth of 4.1%. Meanwhile, the broader sector has lost 10.6%.

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 32.64X compared with the S&P 500’s 21.16X and the sector’s 18.91X.

Over the past five years, the industry has traded as high as 32.64X, as low as 19.65X, and at the median of 24.39X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Near-term prospects of players in the cosmetic universe appear bleak due to coronavirus-led concerns. Restrictions on global travel, supply-chain disruptions, and temporary store closures in several regions are likely to hamper growth. Nevertheless, strength in digital operations is expected to offer some cushion. Further, contributions from buyouts, innovation and other brand-building efforts bode well.

That said, we are presenting three stocks from the Cosmetics industry, which are well positioned to capitalize on opportunities.

Nu Skin Enterprises, Inc. (NUS - Free Report) : This provider of cosmetics, beauty wellness and personal care products has an estimated long-term earnings growth rate of 1.7%. Further, the Zacks Rank #2 (Buy) company has a positive earnings surprise of 13.5% for the last four quarters, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: NUS

The Estee Lauder Companies Inc. (EL - Free Report) : This Zacks Rank #3 (Hold) stock has an estimated long-term earnings growth rate of 9.7%. This cosmetics giant has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by 13.4% in the trailing four quarters, on average.

Price and Consensus: EL

Coty Inc. (COTY - Free Report) : This beauty products biggie has an estimated long-term earnings growth rate of 8.1%. This Zacks Rank #3 company has a trailing four-quarter positive earnings surprise of 9.4%, on average.

Price and Consensus: COTY

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