Saturday, October 31, 2009

Cosmetics Stocks EL, REV, RDEN Can Make Your Portfolio Beautiful

It’s better to look good than to feel good. At least, that’s what one famous comedian used to say. And though I don’t think most women live by that adage, there is one thing for certain; women certainly take their beauty needs seriously. This week we found out just how serious women have been of late when it comes to their cosmetic purchases.

On Thursday, Oct. 29, cosmetic maker Revlon (REV) dressed up the Street with an unexpectedly strong third-quarter showing. The beauty products maker earned $23.1 million, or 45 cents a share, compared with a profit of $29.2 million, or 57 cents, in the year-ago period. It was certainly down, but consensus estimates called for a loss of 16 cents a share.

As you might expect after such a surprise earnings beat, REV shares soared in the session. Well, soared really isn’t the right word. Exploded is the more appropriate term, as they ended Thursday’s session an amazing 43% higher. The Revlon beat and subsequent takeoff in the shares was indeed impressive, but Revlon wasn’t the only cosmetic company that tantalized the Street Thursday.

Upscale cosmetics maker Elizabeth Arden (RDEN) also posted an unexpected profit, and though the shares ended the session lower, they did surge higher initially in reaction to the earnings news. The company earned $40,000, or essentially flat earnings per share, in the quarter. And though that may not seem impressive, it is when compared to the loss of $12.5 million, or 45 cents, in the same quarter one year ago. The number also was well above estimates for a loss of 6 cents per share.

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Perhaps more important than Elizabeth Arden’s past quarter was the company’s forecast for the next three months. Here it expects fiscal second-quarter earnings to come in between 65 cents and 75 cents a share. Elizabeth Arden also raised its full-year revenue and earnings forecast. The company expects to earn 55 to 65 cents per share for the full fiscal year. It also expects net sales to rise 2.5% to 3.5%. Its previous forecast was for earnings of 50 to 65 cents per share along with a net sales increase of 2% to 3.5%.

On Friday, Oct. 30, we found out how well another cosmetic giant, Estee Lauder (EL), did in their most recent quarter. Before the release -- several weeks ago -- Estee Lauder gave us a hint at how well things were going by issuing a very upbeat forecast for its fiscal Q1, saying they expect profits to be significantly higher than originally anticipated. Well, the company did not disappoint.

EL reported a huge increase in quarterly profit, while also raising its 2010 forecast. Estee Lauder earned $140.7 million, or 85 cents per share excluding one-time charges, in fiscal Q1, up substantially from $51.1 million, or 26 cents per share, in the year prior. The consensus forecast was for earnings of just 34 cents per share. Once again, a cosmetics company earnings beat cause traders to swoon, as EL shares rose nearly 10% in pre-market trade, and gapped up higher immediately after the ringing of Friday’s opening bell.

There are a lot of reasons why Revlon, Elizabeth Arden and Estee Lauder are enjoying better days here. For starters, women have grown tired of the “frugal nation” mentality that permeated the national zeitgeist in late 2008 and early 2009. Also, strong economic growth in Asia, particularly China, has created a whole new cosmetics consumer class with a lot of expendable income to devote to beauty needs. Finally, increased sales of cosmetic products at duty-free shops have helped spur the revenue of all three of these cosmetics makers.

The one exception to the bevy of better-than-expected cosmetics company performances is Avon (AVP). On Thursday, the company reported a 30% profit decline, earning $156.2 million, or 42 cents per share on an adjusted basis, in the third quarter. That’s down sharply from the $222.6 million, or 52 cents per share, in the same quarter a year ago. But despite the decline in profits, the 42 cents per share did beat analyst estimates for a profit of 40 cents per share. AVP shares were down over 1% in Thursday trade.

I think the outlook for cosmetics makers is good here, especially for the higher-end brands like Elizabeth Arden and Estee Lauder, but I suspect all four of these stocks will continue looking better and better over the next several months. And while it may not be better to look good than to feel good, there’s nothing wrong with making your portfolio look good via a little cosmetic help.

By Jim Woods, Contributing Editor, InvestorPlace

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