NEW YORK — The outlook on the newly public Estee Lauder Cos. continues to be bullish.
Dillon, Read & Co., one of the underwriters of Lauder’s initial public offering last month, is projecting earnings increases of 21 percent a year over the next three years on expected sales gains of 9 percent annually.
Earnings gains will outpace sales gains because of improved margins and reduced expenses as a percentage of sales, according to a research report by analyst Peter N. Schaeffer dated Dec. 13.
In the report, Schaeffer noted that selling, general and administrative expenses at Lauder have improved “dramatically” over the last few years and have dropped to 39.1 percent of sales this year, from 40.3 per cent in 1994. “We anticipate that reductions in this area will continue,” he said, estimating an improvement in 1996 to 38.2 percent and in 1997 to 37.2 percent.
On the gross margin side, Schaeffer says that while he doesn’t expect “aggressive growth” in sales, he expects margin improvements to bolster the bottom line. “Through various initiatives, the company has been able to improve gross margins from 75.8 percent in 1993 to 76.7 in 1995,” he said. “We expect the margin rise to continue through fiscal 1996,” he added, noting, however, that a slight decrease could take place late next year, reflecting raw material price increases as supplier contracts expire. Overall, Schaeffer expects operating income will increase to 9.7 percent of sales in 1996 from 6.8 percent, adding, “It is our opinion that operating income will continue to rise into the low double digits, approaching 12 percent by the year 2000.”
While conceding that at the current price of around $36 per share the stock is selling at a “rich” multiple of 35 times estimated earnings of $1.02 a share for calendar 1995, Schaeffer said the company will continue to trade at “inflated multiples” as long as results continue to meet or top expectations. As a result, he rates the stock as “outperform.”
Schaeffer stated that while he feels the stock is “fairly priced” now, he would not be surprised to see it selling at $45 to $50 in 1996.
On a fiscal-year basis, Schaeffer projected earnings of $1.12 a share in 1996, compared with 88 cents in the year ended June 30. For fiscal 1997, he projected earnings of $1.32 a share.
In evaluating Lauder, Schaeffer pointed out that its market share in the United States is approaching 40 percent of the prestige cosmetics business and that in Europe, the company’s brands rank number one or two wherever they are sold. In Japan, the company has a 32 percent market share.
Estee Lauder Cos. stock closedat 34 3/4, up 1/4, Thursday on the New York Stock Exchange. — Fairchild News Service

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