Stock's Bullish Pattern Targets 17% Returns for Traders Who Buy Now
Based largely on the Fed's quantitative easing, the S&P 500 is having a very strong year, up about 11%. A group that's doing even better is consumer goods, which are ahead about 13% year to date. One company in this group that particularly stands out for me is Estee Lauder (NYSE: EL).
The maker of skincare products, makeup and fragrances has grown more quickly than other personal care companies. In 2014, management's goal is to outperform the global beauty products industry by at least 1%. The stock is attractive to me for several reasons.
It has a highly bullish chart that features a major uptrend dating back to mid-2011. Having just broken out of a long-term base, the shares are still close to solid support, limiting risk. The company also has solid fundamental growth and offers a reasonable dividend, which should provide some downside protection if the overall market corrects.
Best known for its Clinique and M.A.C makeup brands, the New York-based company is seeing explosive growth, especially in the Asia-Pacific region, where there's increasing demand for luxury Western beauty products.
In fiscal 2012, ended in June, the company reported total revenues of $9.7 billion, up 10% from the prior year. The Asia-Pacific region accounted for 20% of total sales, with China -- the third largest market for the company's products after the United States and UK -- accounting for a quarter of that revenue.
After opening a R&D cosmetics center in Shanghai in 2011, the company launched its first China-specific brand, Osiao, last year. Chinese women could be the "beauty industry's next great influencers," and Estee Lauder expects sales of Osiao to drive future Asian growth.
Currently, Chinese women have access to Estee Lauder products in 66 cities across the country, and it was recently named the best digital brand in China. Moving forward, the company plans to expand into smaller Chinese cities, primarily through e-commerce.
In fact, e-commerce is expected to be a significant global growth driver for the company as a whole. At present, e-commerce sales comprise about 4% of total revenue. Within the next 10 years, management expects e-commerce revenue to triple.
Travel retail outlets, such as those found in airports, should also help boost sales. Between 2009 and 2012, revenue from travel stores doubled, hitting nearly $1 billion at the end of 2012. This amount accounted for about 10% of the company's total annual revenue. Moving forward, Estee Lauder plans to promote and open new retail travel stores, driving further revenue growth.
Shareholders appear confident about the stock, with EL hitting a new all-time high above $68 on Friday.
Climbing from an October 2011 low of $39.76, shares have formed a major uptrend, rising more than 70% to date.
Around this time last year, the stock peaked at a high above $64, but was unable to sustain that level and fell to a July low under $50. Shares once again tested the $64 level in October, but were unable to break past this resistance.
In early 2013, the stock crept above $64, but encountered another shelf of resistance around $66.51. From January to early April, the stock consolidated in a narrow trading range between $66.51 resistance and support near $61.87.
This April 8 trading week, shares blasted through $66.51 resistance to a new all-time high, rising about 8% during the week. In doing so, the stock completed both a small rectangle and larger ascending triangle.
According to the measuring principle for a rectangle -- calculated by adding the height of the pattern to the breakout level -- shares could reach a new high of $71.15 ($66.51-$61.87 = $4.64; $4.64+$66.51 = $71.15). At current levels, this target represents 5% potential returns.
However, the breakout from the ascending triangle projects a much higher target. Again, using the measuring principle, we get a target of just above $80 ($64.61-$49.06 = $15.55; $15.55 +$64.61 = $80.16), almost 18% above current prices.
The bullish technical outlook is supported by strong fundamentals.
For the upcoming fiscal third quarter of 2013, scheduled to be reported May 2, analysts project revenue will increase 3.6% to $2.33 billion from $2.25 billion in the comparable year-earlier period. For the fourth quarter of 2013, ending in June, analysts expect an 8.9% increase with revenue hitting $2.45 billion from $2.25 billion in the year-ago quarter.
Over the full 2013 fiscal year, analysts estimate growth, especially in the Asia-Pacific region, will drive revenue up 5.6% to $10.26 billion, compared with $9.72 billion last year.
The earnings outlook is similarly solid. Although analysts expect fiscal third-quarter 2013 earnings to dip to $0.34 per share from $0.38 in the comparable year-ago period, they anticipate fiscal fourth-quarter earnings will nearly double, hitting $0.30 per share from $0.17 in the year-earlier quarter.
For the full 2013 fiscal year, analysts estimate earnings will increase 14% to $2.59 per share from $2.27 last year.
In addition to a strong technical and fundamental outlook, the company offers a reasonable forward annual dividend yield of about 1.1%, or $0.72 per share. Since the company started paying dividends in 1996, management has regularly increased the payout.
Risks to consider: Estee Lauder is heavily focused on international expansion, especially in China, so a slowdown in the Chinese economy could crimp sales of the company's luxury beauty products -- a highly discretionary purchase. For now, however, the company appears on a strong growth trajectory and should continue to perform well.
Recommended Trade Setup:
-- Buy EL at the market price
-- Set stop-loss at $61.88, slightly below the major trendline
-- Set initial price target at $79.88 for a potential 17% gain by late fall 2013