Analyst: elf Beauty Positioned As Takeout Target

Beauty product company e.l.f. Beauty Inc ELF has seen its stock fall 30 percent since the start of 2018 — and investors should consider buying the dip, according to D.A. Davidson.

The Analyst

Analyst Linda Bolton Weiser maintains a Buy rating on elf Beauty's stock rating with an unchanged 12-18-month $23 price target and five-year price target of $40.

The Thesis

Investors punished elf's stock after finding fault with the company's announcement that its products would be included in thousands of Walgreens Boots Alliance Inc WBA's stores, Bolton Weiser said in a Monday report.

Elf said the inclusion will help it achieve its 6-8-percent 2018 sales growth guidance rather than exceed it, as many might have expected, the analyst said. Some Street commentators are going so far as to suggest elf will miss its 2018 guidance, a concept Bolton Weiser said is "way off base."

The reality is that reaching 6-8-percent sales guidance is a rare feat in the beauty space, the analyst said. This level of growth implies the company is far from "low quality" and warrants a multiple expansion, she said. 

The stock's 10.7x EBITDA multiple is a discount to multiple peers with poorer growth rates, Bolton Weiser said. For example, industry giant Estee Lauder Companies Inc EL trades at a 15.1 EBITDA multiple, but with a long-term sales growth target of 6-8 percent.

Elf's stock is trading at an attractive valuation at which it could be acquired, the analyst said. Recent deals in the space include Estee Lauder's acquisition of Too Faced for five times sales, which, if applied to elf's estimated 2018 sales of $289 million, implies a $1.01-billion takeout valuation. This also implies a 40-percent premium to elf's equity market value and a 16-percent premium over its enterprise value, Bolton Weiser said. 

Price Action

Shares of e.l.f. Beauty were rallying 5.58 percent to $16.09 at the time of publication Monday. 

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