3 Stocks for Good Skin and Great Profits

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Wrinkles are out. Uneven skin tone is in.

So reports Dr. Bernhard Fink, a biologist at Germany's University of Gottingen, in a recent story in The Financial Times. Fink has been exploring the science of attractiveness with Procter & Gamble (NYS: PG) for six years now, and his research has revealed something startling: It's not wrinkles that make you look old, it's uneven skin tone.

This revolution in skin care thinking has the potential to open brand-new revenue streams for any companies hip to it, like the three we're going to talk about here. But first...

Let's get small
As it turns out, when you look very closely at skin you see that it's made up of tiny dots, like the pixels on a computer screen. As you age, these tiny dots separate, becoming distinct in their color and shading. This gives the impression of unevenness, which is interpreted by the human brain as ageing.

While none of the companies we're about to look at are giving away any of their secrets as to exactly how their products work, most seem to address the issue of uneven skin tone at the pigmentation level. That is, these aren't just variations on foundation or concealer, products that have been around for generations, but rather treatments that physically even out the skin's appearance. Here are the companies with their best players in the new skin-tone game:

1.Estee Lauder (NYS: EL) Estee Lauder is at the forefront of product development in this new skin-care arena, offering not one, but two, products:

  • Under its Clinique brand, the company is selling Even Better Clinical Dark Spot Corrector, which quickly became a global hit when it launched last year. The company now sells one bottle worldwide every 9.8 seconds.
  • Under its Estee Lauder brand, the company is selling Idealist Even Skintone Illuminator, which the company called out in its most recent annual report as a contributor to increased sales in the skin-care product category.

As a company overall, Estee Lauder is doing quite well. Sales are up 20% over the last three years, gross margin is a currently an impressive 78%, and profits are up a staggering 208%.

2.Olay
Known previously as Oil of Olay, Olay is now part of Procter & Gamble's vast stable of consumer brands. Its entry in the skin-tone-evening category is Pro-X Discoloration Fighting Concentrate, which is part of Olay's new Professional Pro-X line of anti-aging facial products.

While P&G doesn't break out numbers specifically for Olay, it breaks numbers out for its beauty segment. There, sales growth was 3% for fiscal 2011. Not exactly booming, but healthy, and in line with P&G's other business segments.

3.Revlon (NYS: REV) Revlon's entry in the skin-tone-evening product category is called Age Defying Spa Face Illuminator. Revlon isn't experiencing quite the boom Estee Lauder is, but the company's performance is solid and it remains an important player in this new game.

Sales for the company overall are healthy, if a bit flat, hovering for the past three years in the $1.3 billion range. Gross margin, at 65%, is very strong. And operating profits grew from $155 million in 2008 to $200 million in 2010, for a glossy 29% uptick.

Here's 20 bucks. Go get yourself something nice.
Women spend a lot of money on beauty products, even more so when economic times are tough (see my column on "the lipstick index"). If this trend really takes off, it could open up a whole new stream of revenue for cosmetics companies.

Consider the money that may shift from Allergan's (NYS: AGN) infamous Botox treatment to these over-the-counter skin-care treatments if this trend holds. One treatment of cosmetic-surgeon-administered Botox can buy an awful lot of Estee Lauder Idealist Even Skintone Illuminator.

And what about men? Today's metrosexual man is availing himself more and more of beauty products and services that were once the sole province of women. At some point, this product trend could trickle down into the bathroom cabinet of the modern man.

Don't hate me because I'm beautiful, Fools
Out of the three companies we looked at, I think Estee Lauder is currently the best positioned to profit from this emerging product trend. It's financially very strong, has two well-respected brands, and is offering a product through both of them.

Of course, I would never count out P&G; it is a consumer goods steamroller with the size, reach, and brand power to also make the most of this trend. As for Revlon, if the trend gets far enough along and trickles down to the drugstore-cosmetics level, it also stands to benefit greatly.

But for now, my bets are on Estee Lauder and Olay (P&G). For another consumer goods stock worth keeping a well-mascaraed eye on, check out this free Motley Fool report: "The Hottest IPO of 2011." To read it now, click here.

At the time this article was published

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