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Risk-Reward With e.l.f. Beauty

- By Jonathan Poland

e.l.f. Beauty (ELF) continues to impress, registering better-than-expected earnings in last week's release. Its revenue came in light at $78.6 million while non-GAAP earnings per share were 30 cents for the fourth-quarter, beating by 9 cents.

But despite what investors should consider good news -- closing 22 retail stores to refocus on e-commence -- the company's stock was hit pretty hard, down 22% that day. e.l.f. Beauty sells cosmetic accessories for women which include eyeliner, mascara, false eyelashes, lipstick, foundation for face, moisturizer, cleanser and others at affordable price points, typically between $1 and $6.


Founded just 15 years ago in Oakland, California, by Joseph Shamah and Scott Vincent Borba, e.l.f. has become a sizable brand with even more growth potential. That would make it a great common stock investment or potential acquisition by a bigger brand. Since coming public in 2016, the company's stock price has done nothing but fall. But just like the market is witnessing with Snap Inc., there's a bottom somewhere and with e.l.f. Beauty's market capitalization under $400 million, that could be now, at just 1.5x sales

The store closings will hit e.l.f. Beauty with a $22 to $25 impairment, but with over 10 million followers across its social media channels, being able to convert them into paying and recurring customers is a much better idea than trying to build a retail footprint for their low-cost cosmetics. The company has a good relationship with Target, which accounts for a larger portion of sales.

The biggest concern right now is the ongoing trade war the U.S. is having with China. There is a 10% tariff imposed on a number of cosmetics imported from China with the possibility of advancing to 25% this year. That would certainly put the company into the red, as it would likely not be able to pass on those hikes to consumers. Assuming that the two governments come to a mutually beneficial agreement (zero tariffs, anyone?) then e.l.f. Beauty's bottom line should remain positive.

If cash flow yield is your thing, then e.l.f. is a sweet deal generating over 11% right now. On a price-earnings basis, paying 16x for a company expected to book 65 to 80 cents by 2020 makes sense as well. However, the real growth driver is in how fast it builds book value, which currently sits at $4.71 per share.

Disclosure: I am not long or short e.l.f.

This article first appeared on GuruFocus.