ELF Stock Study (4-22-24)

Posted by Mark on April 16, 2024 at 14:10 | Last modified: April 22, 2024 22:34

I recently did a stock study on e.l.f. Beauty, Inc. (ELF) with a previous closing price of $156.73.

M* writes:

     > e.l.f. Beauty Inc is a cosmetic company based in the US. The company
     > offers cosmetic accessories for women which include eyeliner, mascara,
     > false eyelashes, lipstick, the foundation for the face, moisturizer,
     > cleanser, and other tools through its stores and e-commerce channels.
     > The products that the company sells are marketed under the e.l.f.
     > Cosmetics, W3LL PEOPLE and Keys Soulcare brands. It carries out the
     > sales within the US and internationally, out of which maximum
     > revenue is generated from the US.

This past weekend, I attended a ClimbUSA.org (Communities Learning to Invest and Mobilize in Business) CBIE (Community Based Investment Enterprises) Spring Cohort webinar. I’m still new to the organization, but they’re involved with teaching kids and adults about investing, investment clubs, and stock analysis using the BetterInvesting approach. The instruction and desire to learn is quite inspirational.

One of the group leaders presented ELF, and I found it interesting because her SSG produced a U/D of 7.5 despite Value Line’s advice that “conservative investors may want to take profits here.”

What will the numbers have to say to me?

I first need to address a data-labeling issue. The ELF FY ends 3/31 with its next earnings date May 22, 2024. Complete 2024 annual results should be available at that time. Since the BI website currently shows data through 2022, I need to increment the year label by one when referencing the website. This applies to Value Line as well.

I also need to exclude some EPS data because raw visual analysis may not clear the barbed wire fence. The website indicates public trading beginning with 2017 (2016 + 1). I will exclude ’15 and ’16. I will also exclude the outlier ’17 EPS (-$39.47/share) and the sudden drop (to $0.12/share) in ’21 due to COVID.

With the data now smoothed, since ’18 this small company has grown sales and EPS at annualized rates of 16.2% and 10.9%, respectively. Lines are somewhat up, straight, and parallel with a sales and EPS dip in ’19. It’s concerning that 2018’s $0.68/share EPS is not eclipsed until ’23, but the history is somewhat brief.

Since ’18, PTPM trails the industry and leads peers while ranging from 6.5% (’22) to 11.1% (’23) with a last-5-year mean of 8.2%. ROE is 18.9% in ’18 and 15.5% in ’23 with a last-5-year mean of 9.3%. Debt-to-Capital is less than the industry and recently below peer averages in decreasing from 44.6% (’18) to 16.7% (’23) with a last-5-year mean of 31.6%.

Current Ratio is 1.5 and Quick Ratio is 0.6. Interest Coverage is a solid 30. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 71.8% and 27.5% for ’24 and ’25, respectively (based on 15 analysts).
• Zacks projects YOY 71.8% and 27.5% for ’24 and ’25, respectively (9 analysts).
• Value Line projects 23.0% annualized growth from ’23-’29.
• CFRA provides ACE of 71.8% growth YOY and 48.0% per year for ’24 and ’23-’25, respectively (17).
• M* projects 2-year annualized growth of 48.1%.

I am forecasting below the entire range at 20.0% per year.

With regard to earnings growth:

• MarketWatch projects 25.2% and 35.0% per year for ’23-’25 and ’23-’26, respectively (based on 16 analysts).
• Nasdaq.com projects 18.8% YOY and per year for ’25 and ’24-’26 [10, 10, and 1 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 35.8%.
• YF projects YOY 79.5% and 19.5% for ’24 and ’25 (15) along with 5-year annualized growth of 35.8%.
• Zacks projects YOY 84.3% and 16.0% for ’24 and ’25 (11) along with 5-year annualized growth of 35.8%.
• Value Line projects 20.8% per year for ’23-’29.
• CFRA projects growth of 168.5% YOY and 79.1% per year for ’24 and ’23-’25, respectively (15).

I have data duplication concerns. YF and Zacks have the same YOY sales forecasts to the thousandths place (0.1%) given 15 and 9 analysts, respectively. Three of four long-term EPS projections are 35.8%. Analysts’ independent arrival at those projections would be more robust than one analysis being duplicated by many sources, but the former is unlikely to match with such precision. I will therefore count 35.8% just once for a mean long-term growth estimate of 28.3%.

My 20.0% EPS forecast is very high but below the analysts’ [even higher] range due largely to these duplication concerns. My initial value is the 2024 Q3 (annualized) $2.26/share (rather than ’23 EPS of $1.11).

My Forecast High P/E is 35.0. Since ’18, high P/E increases from 45.7 to 75.6 (’23) with a last-5-year mean of 71.7 (106 including ’21) and a last-5-year-mean average P/E of 54.4. I am forecasting at the upper end of my comfort zone.

My Forecast Low P/E is 25.0. Since ’18, low P/E ranges from 18.5 in ’23 to 54.2 in ’22 with a last-5-year mean of 29.6 (37.0 including ’21). I am forecasting just above the 24.1 median (25.7 including ’21).

My Low Stock Price Forecast (LSPF) is $100/share. The default based on $2.26/share is $56.50: 64.0% less than the previous close and 32.6% less than the 52-week low. This may be unreasonably low. I would not consider the 52-week low to be unreasonably low unless ELF is now a qualitative different company after acquiring Naturium. Value Line says Naturium “experienced exceptional growth, with net sales increasing at an approximately 80% compound annual growth rate over the last two years, and $90 million of net sales were expected this year.” With ELF posting $579M in ’23 revenue, the acquired revenue amounts to ~16% bump: not a qualitative change in this analyst’s view. Just to further preclude the possibility of being extreme, I have raised my LSPF from 52-week low to triple digits.

These inputs land ELF in the HOLD zone with a U/D ratio of 0.7. The Total Annualized Return (TAR) is 4.7%.

PAR (using Forecast Average—not High—P/E) of 1.5% is less than the current yield on T-bills. Even if a healthy margin of safety (MOS) anchors this study to justify TAR, T-bills offer a higher risk-free return.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 76 studies over the past 90 days (my study and 23 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 20.0%, 19.3%, 68.6, and 30.0. My P/E range is lower but my growth forecasts are not. Value Line projects an average annual P/E of 40.0, which is lower than MS (48.8) and higher than mine (30.0).

MS high/low EPS is $5.14/$2.23 versus my $5.62/$2.26 (per share). My high EPS is due to a higher growth rate. Value Line projects a high P/E of $5.15/share.

MS LSPF of $67.80 implies a Forecast Low P/E of 30.4: in-line with the above-stated 30.0. MS default LSPF is 32.2% less than mine: $2.23/share * 30.0 = $66.90. This makes for more conservative zoning.

My TAR (over 15.0% preferred) is much less than MS 13.8%. Despite using a much higher LSPF, MOS seems robust in the current study due to my lower forecast P/E range.

With regard to valuation, PEG is 1.2 and 2.9 per Zacks and my projected P/E: fairly valued and overvalued, respectively. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is expensive at 1.4.

My overall takeaway is two-fold with the first point being no surprise to see a stock up 177% in the past year as far extended from the BUY range as ELF is today.

Second, I am personally very reluctant to entertain a sky-high P/E several years into the future even though it may cause me to miss the occasional NVDA. Such P/E levels are “priced to perfection” with one misstep being all it takes for a subsequent fall back to earth. The 7.5 U/D referenced at the top coincides with a Forecast Low P/E of 60.

I would look to re-evaluate ELF under $125/share. With a forecast high price over $196, TAR should meet my 15% criterion around $98/share.

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