Colgate-Palmolive Company (NYSE:CL) shares are down more than -1.10% this year and recently increased 0.09% or $0.07 to settle at $74.62. The Estee Lauder Companies Inc. (NYSE:EL), on the other hand, is up 1.01% year to date as of 01/15/2018. It currently trades at $128.53 and has returned -1.12% 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. 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CL to grow earnings at a 8.06% annual rate over the next 5 years. Comparatively, EL is expected to grow at a 12.45% annual rate. All else equal, EL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 19.3% 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.
If there’s one thing investors care more about than earnings, it’s cash flow. CL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.54. Comparatively, EL’s free cash flow per share was -0.40. On a percent-of-sales basis, CL’s free cash flow was 3.12% while EL converted -1.25% of its revenues into cash flow. This means that, for a given level of sales, CL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. 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 24.03, and a P/S of 4.28, compared to a forward P/E of 27.62, a P/B of 10.01, and a P/S of 3.88 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
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. CL is currently priced at a -1.49% to its one-year price target of 75.75. Comparatively, EL is -3.9% relative to its price target of 133.75. This suggests that EL 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 2.00 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 0.81 and EL’s beta is 0.72. EL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CL has a short ratio of 2.81 compared to a short interest of 2.72 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 7 of the 14 factors compared between the two stocks. EL is more profitable and higher liquidity. EL is more undervalued relative to its price target. Finally, EL has better sentiment signals based on short interest.