Should You Pick Estée Lauder Stock At $65?

Estée Lauder stock (NYSE: EL) has had a tough year so far, with its stock declining over 50%, while the broader S&P500 index has risen 20%. The company has been struggling with falling sales and profits lately. For perspective, its adjusted 2024 earnings of $2.59 per share were down 25% y-o-y, and down 64% from the $7.24 figure it reported in 2022.

Estée Lauder recently reported Q1’25 results (the fiscal year ends in June) with revenue of $3.4 billion and earnings of $0.14, compared to the consensus estimates of $3.4 billion and $0.09, respectively. However, the company is facing headwinds from weak consumer sentiment in China. It also withdrew its 2025 outlook.

How Did Estée Lauder Fare In Q1?

Estée Lauder’s revenue of $3.4 billion in Q1 was down 5% y-o-y on an organic basis. The company reported an 8% fall in Skin Care sales, 6% decline in Hair Care, 2% drop in Makeup sales, and the Fragrance revenues were down 1%. Looking at sales by geography, EMEA was down 4%, Americas was down 1%, and Asia Pacific down 11%. The decline in the EMEA region can be attributed to lower sales for the company’s global travel retail business. A continued decline in mainland China weighed on overall Asia Pacific sales.

The company reported an adjusted operating margin of 4.3% in Q1’25, reflecting a 120 bps rise y-o-y.  The adjusted EPS stood at $0.14, vs. $0.11 in the prior-year quarter. Looking forward, Estée Lauder has withdrawn its 2025 outlook. The company’s earlier outlook was for 2025 sales to fall between 1% and 2% versus 2024, and its adjusted earnings per share to be in the range of $2.75 and $2.95. However, it appears the results will likely be much worse than earlier anticipated. We forecast the company’s top line to be around $15 billion, reflecting a 4% y-o-y decline. And, we expect the adjusted earnings to plunge to $1.86 per share in fiscal 2025.

How Does This Impact EL Stock?

EL stock has seen a large 25% decline after it reported its Q1 results. The investors are more concerned about the situation in China and how will it impact the company’s earnings. China is seeing lower demand for premium beauty products, especially from internationals brands. The local brands, such as Chicmax Cosmetics and Proya seem to be doing well.  We now estimate Estée Lauder’s Valuation to be $80 per share, reflecting around 20% upside from its current levels of $66.

EL stock has enjoyed higher valuation multiples in recent years, with its average P/E ratio of 54x over the last five years. However, with falling sales and profitability, and trends in China prestige beauty demand, we think the valuation multiple will likely remain lower in the near term. Our forecast of $80 for EL stock represents a 43x P/E ratio based on expected earnings of $1.86 per share. The 43x figure reflects a 20% cut from the stock’s last-five year average of 54x.

EL stock has suffered a sharp decline of 75% from levels of $255 in early January 2021 to around $65 now, vs. an increase of about 55% for the S&P 500 over this period. Returns for EL stock were 40% in 2021, -32% in 2022, and -40% 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 CL, and PG, 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.

While EL stock looks like it has some 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 11/5/2024
[2] Cumulative total returns since the end of 2016

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