Are you looking for an opportunity to invest in a stock with strong upside that most people have never heard of?
Let us introduce you to e.l.f. Cosmetics.
Elf is a retail beauty company who specializes in selling makeup and skincare.
While we realize this may scare some investors given the headwinds with retail, when you peel back the layers, there is a lot more going on beneath the scenes than meets the eye. Let us explain 👇
Elf overview:
As we mentioned above Elf is a retail beauty company. But unlike many other retail beauty companies, Elf is producing financial results that far outpace any of their peers.
For example during their most recent earnings call, not only did they outperform expectations, but they actually crushed them. Here's the key takeaways from what we saw:
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Elf beat revenue expectations by a wide margin. When looking at the numbers, we saw that Q3 revenue was 3% above expectations and up 11% since last year. This is really promising due to two reasons:
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The first is because last quarter most consumer packaged goods companies (CPG) started to feel the pullback in retail demand. In case you missed it, we correctly predicted that retail demand was going to slow down because it had been outpacing income growth for the last year (something that has historically always grown at the same rate). There's plenty of reasons this happened (which you can find in the linked analysis above), but the pending outcome was that revenue going forward was going to start hurting for a lot of retail companies. So when this occurred, and Elf kept their sales not only stable but grew them, we knew we were looking at a company that was miles ahead of their competition.
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The second is because of their potential going forward for international expansion. When looking at their revenue, we see that only 11% of it came from sales outside the US. With beauty being such an untapped market for them internationally, Elf has the ability to pull on a growth lever that most other major cosmetic companies have already pulled on.
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Elf also beat margin expectations and grew margins by 1.1% since last year. And similar to the story above, relative to their peers and other CPG companies, Elf was one of the only companies in their peer group able to pull this off. During a time of retail contraction, rising material costs & FX headwinds, margin expansion and revenue growth is usually far from attainable. The fact that they were able to do not only one, but both, speaks to the strength of their company. With over 12M followers across their social channels and 2.7 million loyalty members, Elf is stronger than most people realize.
Elf Expectations:
And while this is all great news, what's more important is if they can keep this up. And by the looks of it, expectations are riding high.
This is because during their earnings call their management team (which has been historically conservative) raised their 2022 guidance. They're saying now that:
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Not only will sales for them stay constant but they're predicting 0 headwinds across the beauty space. Based off the initial reactions to the variants, each subsequent variant has impacted their business less and less. With the next variant likely to be even more transmissible than Omicron but less deadly, we think this trend for Elf will continue in perpetuity. Therefore we believe demand for their products should rise as more and more countries continue the re-opening process.
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They're predicting for a potential M&A deal to be done in 2022. In a space where valuations are low and multiples are even lower, a "cheap" deal would be a huge win for them in 2022. This in addition to their core business, could be a strong point of synergies -- should they pull it off. There's nothing actionable here yet but the hint towards an acquisition, is positive news for their outlook.
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By the end of 2022, their management team is expecting at least $375M in revenue, adjusted EPS of $0.75 and EBITDA of $71M. This revision upwards is extremely encouraging because it raises what was expected only a quarter ago by 5-10% on average. This means that after just one month of 2022, Elf has seen enough that they feel strong enough to believe 2022 will be even better than they originally anticipated. Again, this is a very strong sign for the company moving forward.
Elf Summary:
The investment case for Elf here is clear. They're a leading CPG company in a sub-space where retail demand is actually expected to expand rather than contract.
Therefore, based on the reasons above, Elf becomes one of our top small cap retail picks over the next few years. Our price target below is what we believe they could do in the short term but believe this could be a 2-3x gainer over the next few years!
Price Target: $38 (33% upside)
Current Price: $28.50
Target Date: Q4 2022
Rating: Overweight
Risk / Reward: Medium / High
Ticker: ELF
Market Cap: $1.5B
Dividend Yield: 0%