The shares of Delta Air Lines (NYSE: DAL) are trading 35% below pre-Covid levels despite stable passenger numbers at TSA checkpoints, largely due to the anticipation of a decline in air travel demand in the near term. However, investors have been optimistic on Estee Lauder stock (NYSE: EL), a cosmetic company with a widespread global presence and sales depending on travel retail demand. This year, Estee Lauder stock has gained a large 38% majorly assisted by historic growth numbers in travel retail and online sales channels, which together contribute around 40% of net sales. While both companies are from different industries, in this article Trefis highlights the similarities in financial metrics including the historical growth numbers, profitability, and risk. Does the uptick in EL stock indicate an upcoming surge in air travel? We compare the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, Delta Air Lines vs. Estee Lauder – parts of which are highlighted below.
Estee Lauder’s growth has been slightly higher than Delta Air Lines before the pandemic, with Estee Lauder’s revenues expanding at an average rate of 10% p.a. from $11.2 billion in FY2016 to $14.8 billion in FY2019 (note: EL’s fiscal year ends on June 30). Delta Air Lines’ revenues grew at an annual rate of 6% from $39.4 billion in 2016 to $47 billion in 2019. Notably, Estee Lauder reported a 4% contraction in topline as compared to a pandemic induced 64% decline in Delta Air Lines’ revenues in 2020.
- Geographically, the Americas, Europe & Middle East, and the Asia Pacific regions contribute 32%, 43%, and 25% of Estee Lauder’s revenues, respectively.
- Since 2018, EL’s Europe and the Asia Pacific regions have observed a growth of 23% and 80%, respectively. As travel retail and online sales have been major contributors toward this growth, EL’s largest customer, a Chinese travel retail firm, saw their revenue contribution jump from 5% in FY2019 to 14% in FY2021.
- Delta Air Lines earns its revenues from the sale of air tickets and other ancillary services such as freight & mail. In the past few years, continued capacity growth along with rising ticket prices have been key contributors to topline growth.
- Delta Air Lines’ domestic and international operations contribute 70% and 30% of total revenues, respectively.
- Interestingly, Delta Air Lines and Estee Lauder’s earnings are driven by domestic and international operations, respectively.
Historically, Estee Lauder and Delta Air Lines have reported a comparable operating profit margin of 15%, despite different product & service offerings.
- In 2019, Estee Lauder reported an operating margin and net income margin of 15.5% and 12%, respectively. The company generated $2.5 billion of operating cash on net sales of $14.9 billion, resulting in an operating cash margin of 17%. Subsequently, the company invested $744 million in property, plant & equipment, returned $2.1 billion to investors in dividends & share repurchases, and received $1.2 billion in property sales.
- Whereas, Delta Air Lines reported an operating margin and net income margin of 14% and 10%, respectively. The company generated $8.4 billion of operating cash of $47 billion in total revenues, resulting in an 18% operating cash margin. Subsequently, it invested $4.9 billion in property, plant & equipment and returned $3 billion to investors in dividends & share repurchases.
- Despite similar profitability and cash generation capabilities, Estee Lauder has been returning almost 85% of operating cash to investors – much lower than 35% by Delta Air Lines.
Delta Air Lines looks like the riskier of the two companies from the perspective of financial leverage.
- In 2020, Estee Lauder and Delta Air Lines reported $5 billion and $27 billion of long-term debt, respectively. With $5 billion and $13 billion of cash & short-term investments on Estee Lauder and Delta Air Lines’ balance sheet, respectively, there is barely any net debt weighing on Estee Lauder.
- If revenue growth stalls due to the new coronavirus variant, Delta’s higher financial leverage will weigh on the stock. However, financial leverage will boost earnings and cash flows as travel demand rebounds after the scare of another infectious wave is put to rest.
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