The Estee Lauder Companies Inc. (NYSE:EL) shares are up more than 65.15% this year and recently increased 1.37% or $1.71 to settle at $126.32. Kimberly-Clark Corporation (NYSE:KMB), on the other hand, is up 1.13% year to date as of 11/13/2017. It currently trades at $115.41 and has returned 5.04% during the past week.
The Estee Lauder Companies Inc. (NYSE:EL) and Kimberly-Clark Corporation (NYSE:KMB) are the two most active stocks in the Personal Products industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect EL to grow earnings at a 11.48% annual rate over the next 5 years. Comparatively, KMB is expected to grow at a 5.43% annual rate. All else equal, EL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 22.24% for Kimberly-Clark Corporation (KMB). EL’s ROI is 16.70% while KMB has a ROI of 31.80%. The interpretation is that KMB’s business generates a higher return on investment than EL’s.
The value of a stock is simply the present value of its future free cash flows. EL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, KMB’s free cash flow per share was +0.71. On a percent-of-sales basis, EL’s free cash flow was -1.25% while KMB converted 1.37% of its revenues into cash flow. This means that, for a given level of sales, KMB is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. EL has a current ratio of 1.80 compared to 1.00 for KMB. This means that EL can more easily cover its most immediate liabilities over the next twelve months. EL’s debt-to-equity ratio is 0.83 versus a D/E of 29.75 for KMB. KMB is therefore the more solvent of the two companies, and has lower financial risk.
EL trades at a forward P/E of 27.29, a P/B of 9.84, and a P/S of 3.78, compared to a forward P/E of 17.68, a P/B of 158.10, and a P/S of 2.23 for KMB. EL is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. EL is currently priced at a -3.6% to its one-year price target of 131.04. Comparatively, KMB is -4.39% relative to its price target of 120.71. This suggests that KMB 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 1.90 for EL and 2.90 for KMB, which implies that analysts are more bullish on the outlook for KMB.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. EL has a beta of 0.65 and KMB’s beta is 0.76. EL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. EL has a short ratio of 2.36 compared to a short interest of 7.76 for KMB. This implies that the market is currently less bearish on the outlook for EL.
Kimberly-Clark Corporation (NYSE:KMB) beats The Estee Lauder Companies Inc. (NYSE:EL) on a total of 7 of the 14 factors compared between the two stocks. KMB is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, KMB is the cheaper of the two stocks on an earnings and sales basis, KMB is more undervalued relative to its price target. Finally, CL has better sentiment signals based on short interest.