Colgate-Palmolive Company (NYSE:CL) shares are up more than 9.14% this year and recently decreased -0.58% or -$0.42 to settle at $71.42. The Estee Lauder Companies Inc. (NYSE:EL), on the other hand, is up 45.27% year to date as of 10/25/2017. It currently trades at $111.12 and has returned 1.04% during the past week.
Colgate-Palmolive Company (NYSE:CL) and The Estee Lauder Companies Inc. (NYSE:EL) are the two most active stocks in the Personal Products industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CL to grow earnings at a 7.57% annual rate over the next 5 years. Comparatively, EL is expected to grow at a 10.95% annual rate. All else equal, EL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 18.47% for The Estee Lauder Companies Inc. (EL). CL’s ROI is 42.70% while EL has a ROI of 16.70%. The interpretation is that CL’s business generates a higher return on investment than EL’s.
Cash is king when it comes to investing. CL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, EL’s free cash flow per share was +0.63. On a percent-of-sales basis, CL’s free cash flow was 0.87% while EL converted 1.96% of its revenues into cash flow. This means that, for a given level of sales, EL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CL has a current ratio of 1.20 compared to 1.80 for EL. This means that EL can more easily cover its most immediate liabilities over the next twelve months.
CL trades at a forward P/E of 22.80, and a P/S of 4.19, compared to a forward P/E of 25.08, a P/B of 9.33, and a P/S of 3.49 for EL. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CL is currently priced at a -7.31% to its one-year price target of 77.05. Comparatively, EL is -5.13% relative to its price target of 117.13. This suggests that CL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for CL and 1.90 for EL, which implies that analysts are more bullish on the outlook for CL.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CL has a beta of 0.80 and EL’s beta is 0.67. EL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CL has a short ratio of 2.13 compared to a short interest of 2.11 for EL. This implies that the market is currently less bearish on the outlook for EL.
The Estee Lauder Companies Inc. (NYSE:EL) beats Colgate-Palmolive Company (NYSE:CL) on a total of 8 of the 14 factors compared between the two stocks. EL is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, EL has better sentiment signals based on short interest.