One UK stock that’s done really well recently is Warpaint London (LSE: W7L). Over the last year, the cosmetic company’s share price has risen about 85%. Over the last five, it’s climbed an amazing 940%.
I’m interested in getting some more cosmetics exposure in my portfolio as I reckon the industry has plenty of growth potential in today’s social media-focused world. Should I buy shares in Warpaint London? Let’s discuss.
An introduction to Warpaint London
For those who don’t know anything about this company, Warpaint London’s a beauty business that’s focused on developing products at affordable prices. Its main brands are W7 and Technic, which are sold by a range of retailers including Boots, Superdrug, Amazon, and Tesco.
The company was co-founded by Sam Bazini and Eoin Macleod, who first went into partnership in the early 1990s, buying and selling close-out and excess stock of cosmetics and fragrances. In 2002, Bazini and Macleod decided to create the Group’s first own brand, W7 (named after the company’s postcode in West London).
In 2016, Warpaint came to the Alternative Investment Market (AIM) via an Initial Public Offering (IPO). Since then, the company’s share price has surged, and today it has a market-cap of around £450m.
The bull case
Now, having done some research on the company, my view is that there’s a lot to like about it from an investment perspective. For starters, the company’s growing at an impressive rate. This year, revenues are expected to come in at £106m. That’s up from £49m in 2019.
Second, the company’s level of profitability is on the up. Last year, return on capital came in at a high 36.1% versus 18.6% a year earlier.
Third, there’s a growing dividend. Over the last five years the payout’s more than doubled (the current yield is about 2%).
Finally, the company is founder-led. I like to invest in founder-led businesses as research shows they often generate huge wealth for investors.
The bear case
I do have a few reservations however. One is in relation to the company’s brand power. When I asked my wife – who spends a ton of money on cosmetics – about the W7 and Technic brands, she’d literally never heard of them. I found that a little odd.
And it makes me wonder if the brands could be vulnerable to competition. Cosmetics is a very competitive market and it’s not particularly hard these days for new entrants to capture market share. Given the dynamics of the industry, I’d think I’d rather invest in premium brands than lower-priced brands.
Another issue for me is the company’s gross profit margin. Last year, it was around 40% which is relatively low. For reference, industry leader L’Oreal has gross margins of around 75%. A lower gross margin can make a company more vulnerable to rising costs.
Finally, there’s the valuation. Currently, the forward-looking price-to-earnings (P/E) ratio here is about 25. That’s not a crazy multiple. But it does add some risk.
Should I buy?
Weighing everything up, I’m going to leave Warpaint London shares on my watchlist for now. I don’t think it’s a bad stock. I reckon there’s a good chance it will keep rising.
I’m just not totally convinced it’s the right fit for my portfolio today.
This post was originally published on Motley Fool
