Should You Pick Estée Lauder Stock At $90?

Estée Lauder stock (NYSE: EL) has had a tough year so far, with its stock falling 40%, while its peer Ulta Beauty stock (NASDAQ: ULTA) has seen a 16% decline. Estée Lauder has been struggling with falling sales and profits lately, but that appears to be priced in now, and we think EL stock looks undervalued at its levels of around $90.

If we look at a slightly longer term, EL stock has declined a significant 75% from levels of over $350 in early 2022 to around $90 now. This can be attributed to a 70% fall in the company’s P/S ratio from 6.8x revenues in 2021 to 2.0x revenues now. Furthermore, the company also saw a 4% decline in revenues from $16.2 billion to $15.6 billion over this period. Our dashboard on Why Estée Lauder Stock Moved has more details.

The decrease in EL stock over the recent years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and an uncertain geopolitical environment, could EL continue to see lower levels, or will it see a recovery? We think EL stock will see higher levels over time. We estimate Estée Lauder’s Valuation to be $120 per share, reflecting over 35% upside from its current levels of $87. EL stock is trading at just 2x trailing revenues, versus the average P/S ratio of 5x seen over the last three years. Although a decline in the valuation multiple seems justified given the fall in earnings lately, the gap between the current and average P/S seems wide in our view, and it should narrow over time. We think investors will likely be better off picking EL in the current dip for robust long-term gains.

Estée Lauder’s revenue decreased from $16.2 billion in 2021 (fiscal ends in June) to $15.6 billion in fiscal 2024, partly due to a weakening consumer spending environment and slower than anticipated pick up in Asia demand. The company reports its revenues under three geographies – The Americas, Europe, the Middle East and Africa, and Asia Pacific. They accounted for 29.4%, 39.3%, and 31.3% of the company’s total sales in 2024. However, Asia Pacific sales were down 6% y-o-y, primarily due to lower demand for prestige beauty in mainland China. Not only did Estée Lauder see lower sales lately, its operating margin contracted from 18.6% in 2021 to 10% in 2024. Its profitability has also been adversely impacted due to increased input costs and higher marketing spending, among other factors.

Looking forward, we expect a rebound in Asia and travel retail in the coming years, bolstering the company’s sales growth. Although 2025 may see tepid top-line expansion, the growth will likely resume in the second half of the next calendar year. Now that the U.S. Federal Reserve has cut interest rates and China has recently announced a series of measures, including rate cuts, to spur its economic growth. There will likely be a positive rub-off on the consumer sentiment in both geographies. This should bode well for Estée Lauder. With a recovery in demand, the profitability should also improve, aiding its earnings growth. We think that the near-term risk factors are now priced in for Estée Lauder, and investors will likely be better off picking its stock in the current dip for robust long-term gains.

While EL stock looks undervalued, 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 9/24/2024
[2] Cumulative total returns since the end of 2016

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