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Opinions Kash Pashootan
Estee LauderELCOMMENTJun 22, 2016
Kash PashootanStock price when the opinion was issued
As of Jun 18, 2026. Market Open.
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EL is a high-quality consumer staple name, which has always traded at a premium valuation. However, EL’s revenue has declined for two years in a row now, which has investors concerned. We think EL is in a bit of turnaround situation now, which we try to stay away from (most turnarounds rarely turn or take longer than expected), we would like to see revenue growth recover before getting interested in EL. Growth out of China is not helping but competition does look like it is increasing across the board as well and we wonder a bit if EL is having trouble adjusting to newer marketing channels that are being used.
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EL’s share price is under tremendous pressure recently due to the weak guidance. Still, at 52X earnings the stock is still on the expensive side, even with a 28% YTD decline. Based on consensus estimates, sales are expected to decline by around -10% this year and start to recover back to 2022’s level in 2024. We think EL still possesses a strong portfolio of worldwide recognized brands for skincare, makeup, fragrance, etc. and these brands have been around for decades and demonstrated consumer loyalty and significant pricing power over the years. Most consumer discretionary names experienced a short-term headwind due to the concern of economic recession. In the last quarter EPS missed estimates. For 2023, EPS is expected to decline by close to 50%. But, nearly 50% growth is expected in a 2024 recovery. Thus, this is a tough call. Momentum is negative, and there are still risks. Valuation is high, but we think that is because investors believe in the rebound possibility. We have recession risk, but the balance sheet is OK (some debt but not an onerous amount). Sentinment is very negative, so any positive news at all should be good for the stock. We would thus be willing to hold to see how the next two quarters fare.
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Upgraded today, but down 25% YTD. It has missed the last three quarters and most recently guided down due to supply chain issues and China reopening slowly and travel retail (mostly from Asia) being down 43%. But ex-travel retail rose 10% last quarter, so eventually these will work. Eventually, China will right itself and sentiment has fallen enough.
It’s a safe bet to assume that the return of the Chinese traveller will boost EL’s bottom line. Rather, it’s a question of how much and how fast? The company itself has beaten its last four quarters. The market is giving shares the benefit of the doubt as EL trades just under 58x PE, above its five-year average of 55.31x and higher than in 2022, but a third during the December 2020 peak. Read China reopens for our full analysis.
Today marks the first day that American business executives can fly to China after three years. Those American companies which already have a strong presence in China can get a major boost from this reopening. The company was thriving before the reopening, so imagine what happens now.
Global and operates in over 150 countries. Skincare is where they are making their money. They are also in fragrance through licensed agreements. Shares have done tremendously well, and a big part of that has been their ability to gain traction in China. Thinks a lot of the future growth in China is already priced in. A catalyst that could add share price appreciation will be their ability to execute on their e-commerce strategy. E-commerce is about 8% of their overall revenue, and if they are able to grow that it will help their income. At 29X PE he wouldn’t be in a rush to Buy this. A very low dividend of about 1.25%.