Turn on CNBC and the first thing you’ll likely see is doomsday predictions. Between what’s going on in Russia and where inflation currently stands — the news is clearly selling us fear.
And while there surely are things to be fearful of, with the Dow down 20% and the Nasdaq down 30% this year, just know two things:
- Things will rebound. It may seem impossible now but after every crash over the last 100+ years, conditions have always rebounded. And that’s why markets have averaged an annual return of 10% since then — with the trend likely to continue.
- But while conditions “are” scary, there are still a handful of companies that are still performing very well — one of which is Elf Beauty. If this sounds familiar it’s because we covered them earlier this year (see it here).
Last we talked about Elf it was February and the stock was trading at $28.50. Well fast forward to today and the stock is up 37% and we couldn’t be more excited about their future.
So how are they doing well when every other stock is falling? And will it continue?
Without recapping the entire analysis from our last update, here’s the high-level overview on Elf.
Elf is a retail beauty company that specializes in selling makeup and skincare. But unlike many other retail beauty companies, Elf is producing financial results that far outpace any of its peers.
Last we mentioned them, they were:
- Beating revenue expectations
- Beating margin expectations
- And their management team was expecting at least $375M in revenue for 2022 — with an adjusted EPS of $0.75 and an EBITDA of $71M
Well fast forward to today and Elf has not only kept up with these trends but they’ve outpaced them — all while remaining undervalued. How is that so?
Well, when we look at the numbers, the only real explanation is that this stock is so small it’s just off everyone’s radars. Let us explain:
- Upon the last earnings report, we see that Elf has accelerated its sales growth even further up from 26% growth in Q1 to 29% growth in Q2. On top of that their three-year CAGR is up to 18% (vs. the 10% average we saw over the last seven quarters)
- But what’s even better is that estimates are calling for 20% growth going into next quarter — which would signal a slowdown. However, from everything we’ve seen, we estimate for Q3 growth to hit 25%. Should Elf hit this number (which they likely will), this means that they will easily surprise to the upside — which would cause a nice jump up in their stock price.
- And lastly, while we could dive into pages of numbers, the most important ones are also beating estimates quarter over quarter.
But while this is great in isolation, what makes us so bullish on Elf’s stock, is what we see when we compare this to their peers.
With all of this, you would think Elf would be overvalued. Think again. Elf actually looks very cheap on all of our screens.
Right now the best valuation metric we can use for Elf is EV/EBITDA. What this means is their enterprise value divided by their EBITDA (earnings before interest, taxes, depreciation, and amortization).
Historically we might have used revenue as a proxy for EBITDA but in today’s time, earnings growth is more important than revenue growth.
And when we look at this number we see their EV/EBITDA multiple is trading at 18.8x. And when we compare this multiple to other companies’ multiples, we see something astonishing. That Elf’s multiple is less than its peers!
More specifically we see that their peer group is trading at 21x (representing an 11% premium). So is this discount justified? From what we can see, we think it’s undervalued and mispriced.
Let us explain further.
Elf vs. Peers:
When we look at their sales growth relative to their peers, we see that Elf is significantly outpacing the field — just check out this graphic.
In this graphic, we see that their sales growth, since the start of this year, is just blowing by everyone else, and is anticipated to grow even wider in the coming quarters.
And this sales growth translates to some massive wins in their overall market share.
I mean these two pictures speak for themselves. But if you need even more convincing, Elf is doing this all while also expanding its profitability — which signals they’ve unlocked the key to scaling.
And while this pick is definitely subject to risk, we see this as one of the best risk-adjusted reward small-cap stocks out there!
While a retail beauty name may sound underwhelming, its the boring plays like these that have massively outperformed this year.
Price Target: $46 (21% upside)
Current Price: $38
Target Date: Q3 2023
Risk / Reward: Medium / Medium
Market Cap: $2B
Dividend Yield: 0%