What’s Next For Estée Lauder Stock After 10% Gains Post Q2 Results?

Estée Lauder (NYSE: EL) reported upbeat Q2’24 results last month (the fiscal year ends in June). The company’s revenues stood at $4.3 billion and earnings came in at $0.88, well above the consensus estimates of $4.2 billion, and $0.34, respectively. The stock has risen 10% since the company reported its Q2 results. However, after its recent move, we think that EL stock has little room for growth. In this note, we discuss Estée Lauder’s stock performance, key takeaways from its recent results, and valuation.

EL stock has suffered a sharp decline of 45% from levels of $265 in early January 2021 to around $150 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the decrease in EL stock has been far from consistent. Returns for the stock were 39% in 2021, -33% in 2022, and -41% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that EL underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including PG, COST, and KO, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could EL face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, EL stock looks like it has little room for growth. We estimate Estée Lauder’s Valuation to be $163 per share, reflecting around 10% upside from its current levels of $149. Our forecast is based on 4x forward sales, aligning with the stock’s average over the last two years.

Estée Lauder’s revenue of $4.3 billion in Q2 was down 7% y-o-y. The company reported a 10% fall in Skin Care sales, 8% decline in Makeup sales, 5% fall in Hair Care revenues, and Fragrance revenues were flat y-o-y. This can be attributed to a weakening consumer spending environment and continued softness in prestige beauty demand in China. The company reported operating margin of 13.4% in Q2’24, reflecting a 140 bps rise y-o-y.  The adjusted EPS stood at $0.88, vs. $1.54 in Q2 2023, reflecting a sharp 43% decline.

Looking forward, Estée Lauder expects its 2024 sales to be in the range of -1% to 1% versus 2023, and its adjusted earnings per share to be in the range of $2.08 and $2.23.  This compares with $3.46 figure it reported in 2023. A softness in consumer demand, slow pickup in Asia travel, and higher costs are some of the factors that may continue to weigh on Estée Lauder’s business in the near term. As such, we don’t foresee any meaningful gains for EL stock in the near term.

While EL stock looks like it has little room for growth, it is helpful to see how Estée Lauder’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 3/8/2024
[2] Cumulative total returns since the end of 2016

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