TD Cowen upgrades e.l.f. Beauty stock, eyes set on growth

On Wednesday, TD Cowen made a notable adjustment to its stance on e.l.f. Beauty (NYSE:ELF) stock, raising the rating from Hold to Buy, despite lowering the price target to $190 from the previous $220. The revision follows a recent decline in the company's share price, which has seen an 11% drop since April 2, 2024, and a 24% fall from its peak value.

TD Cowen's analysis suggests that e.l.f. Beauty has the potential to double its revenues over the next three years, projecting an annual growth rate in the low-to-mid 20s.

This optimistic outlook is attributed to the company's effective digital community marketing, an "awareness flywheel," expansion into skincare and international markets, and a valuation price-to-earnings-growth (P/E/G) ratio of approximately 1.5x compared to the 1.8x average of its peers.

The firm's confidence in e.l.f. Beauty is also based on what it perceives as the company's sustainable momentum, not merely a temporary trend. The brand's success is built on a foundation of consistent innovation, delivering high-quality yet affordable products, with an average unit retail price of around $6, significantly lower than the average of more than $9 among competitors.

e.l.f. Beauty's market position is further reinforced by its number three share in color cosmetics and its ability to rapidly respond to market trends, thanks in part to a 13-week production cycle. This agility in innovation is complemented by a strong direct-to-consumer relationship through social media marketing.

The financial health of e.l.f. Beauty is also highlighted, with a solid balance sheet featuring a net cash position of approximately $70 million and free cash flow representing a low teens percentage of sales.

Despite the recent pullback in stock price, TD Cowen's revised price target of $190 still implies about a 15% upside from the current level, based on a forward price-to-earnings (P/E) multiple of around 44 times the firm's estimated fiscal year 2026 earnings per share of $4.30. The analysis concludes that a mid-40s P/E multiple is justified for e.l.f. Beauty given its current growth trajectory.

In light of TD Cowen's recent rating upgrade for e.l.f. Beauty, InvestingPro data and tips provide additional context to the company's financial outlook. Analysts anticipate sales growth in the current year, which aligns with TD Cowen's projection of e.l.f. Beauty doubling its revenues over the next three years. This is supported by a remarkable revenue growth of 79.24% over the last twelve months as of Q3 2024. Moreover, the company's gross profit margins stand strong at 70.33%, underscoring its ability to maintain profitability amidst expansion efforts.

The current P/E ratio of 69.21, although high, is balanced by a PEG ratio of just 0.43, indicating that the stock could be trading at a low price relative to near-term earnings growth. This complements TD Cowen's analysis of the company's valuation and growth prospects. Additionally, e.l.f. Beauty's impressive one-year price total return of 82.57% reflects the market's positive reception to its growth strategy and operational efficiency.

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For investors seeking a deeper dive into e.l.f. Beauty's financials, InvestingPro offers a range of tips, including insights into the company's stock volatility and coverage of interest payments by cash flows. In total, there are 21 additional InvestingPro Tips available for e.l.f. Beauty, which can be accessed for those looking to make an informed investment decision. To take advantage of these insights, use coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

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