Buy This World-Class Stock On The Pullback For 20%-Plus Upside

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Nobody likes getting old. Yet it is one of life's few inevitables. However, there are a handful of companies that allow people to age more gracefully with anti-aging products.

Nu Skin Enterprises (NYSE: NUS) is one of these companies. However, its stock is already up 75% over the past 12 months. There's still one company that looks to be a value in the fight against aging, and that's Estee Lauder (NYSE: EL).

The recent pullback in Estee Lauder's shares appears to be a buying opportunity. The company is down nearly 7% with year, compared with an S&P 500 that's flat.

There are only a few global cosmetic companies, and Estee Lauder is one of them. Its various skin care and fragrance products are sold in department stores, company-owned retail stores and travel-related outlets such as airport shops. North America makes up less than 40% of Estee's sales, meaning the company is very much a global operator.

It's already the market leader in China when it comes to skin care and makeup. China is Estee's third-largest market by revenues, behind the U.S. and the U.K., and the company only has about half of its brands in China, meaning there's an opportunity to further expand there.

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All in all, Estee gets only about a third of its revenues from emerging markets, exposure that I'd expect Estee to increase, considering that developing economies have some of the fastest-growing middle classes.

Estee's largest customer, the department store giant Macy's (NYSE: M), which accounts for over 10% of sales (and which I profiled a couple of months ago), is also performing nicely. This is good news for Estee Lauder, as is the fact that Macy's continues to attract shoppers, especially as the retailer introduces new store-within-a-store concepts. As a result, Estee's Clinique counters should see more traffic.

Travel Retail Presents A Big Opportunity
Less than 15% of travelers actually buy beauty products in airport stores, meaning Estee has a large opportunity to convert more travelers into shoppers. Travel retail only represents 12% of Estee Lauder's sales; meanwhile, travel is one of the company's most profitable segments.


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  With the rapidly aging population in the U.S., Estee's push into anti-aging products should provide another revenue stream.  
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Last quarter, Estee Lauder saw double-digit net sales growth in the travel retail segment. More growth should be helped by China, which is expected to add nearly 100 airports over the next 10 years, according to the Global Business Travel Association. Domestic passenger growth in China is expected to grow at 10% over the next half decade. Estee is targeting similar double-digit growth in the retail travel business, with a focus on Asia.

Product Innovation Continues To Be A Growth Driver
With the rapidly aging population in the U.S., Estee's push into anti-aging products should provide another revenue stream. Also, assuming a potential rise in employment in the U.S., shoppers will have more money to spend on anti-aging products, including several new Estee products.

Catering to a diverse variety of markets is another thing that differentiates Estee Lauder from competitors. It offers an array of products that are tailored to specific geographical locations -- including the Middle East, Asia and Africa -- that take ethnicity into account. Estee is also planning to expand its product portfolio into other areas, namely acne prevention.

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Estee is trading at around 21 times next year's earnings, but with its impressive growth prospects, a higher valuation is more than justified. Over the past five years, Estee has traded at an average of 26.5 times earnings. The company also offers a 1.2% forward dividend yield.

Risks to Consider: Estee's consumer discretionary products are highly dependent on consumers having excess money to spend. If employment remains high, it could put a strain on Estee's sales.

Action to Take --> Buy Estee with upside to $85. With its global presence and retail partnerships providing the company a wide moat, Estee shouldn't have a problem getting back to its historical average earnings multiple. At 26.5 times earnings, on estimated fiscal 2015 EPS of $3.23 a share, the upside is to $85, suggesting over 20% upside in just over a year's time.

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