Why did Estée Lauder stock fall 75%?

Estee Lauder shares (NYSE:EL) has had a tough year so far, with its shares down 40% while its competitors Ulta Beauty refill Estée Lauder (NASDAQ:ULTA) is down 16%. Estée Lauder has been struggling with declining sales and earnings recently, but that seems to be priced in, and in our opinion, EL shares look undervalued at around $90.

If we take a slightly longer view, EL stock has fallen a significant 75% from over $350 in early 2022 to around $90 today. This can be attributed to a 70% decline in the company’s P/S multiple from 6.8x revenue in 2021 to 2.0x revenue today. Additionally, the company has also seen a 4% decline in revenue from $16.2 billion to $15.6 billion during the period. Our panel on Why Estée Lauder Stock Has Changed has more details.

EL’s stock decline in recent years has been far from consistent, with annual returns being much more volatile than the S&P 500. In contrast, the Trefis High Quality Portfolio, with its collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 every year in the same period. Why? As a group, HQ Portfolio stocks delivered better returns with less risk compared to the benchmark index; it was not as exciting an experience as HQ Portfolio’s performance metrics suggest.

Given the current uncertain macroeconomic environment around rate cuts and the uncertain geopolitical environment, can EL continue to trade lower or will it see a recovery? We believe EL stock will trade higher over time. We estimate that Estee Lauder Pricing $120 per share, representing a 35% increase from current levels of $87. EL stock is trading at just 2x recent earnings, compared to an average P/S multiple of 5x seen over the past three years. While the decline in valuation multiple seems reasonable given the recent earnings decline, in our view the difference between the current and average P/S multiples seems large and should narrow over time. We believe investors are likely better off picking EL in the current dip for solid long-term gains.

Estée Lauder revenues fell from $16.2 billion in fiscal 2021 (the fiscal year ends in June) to $15.6 billion in fiscal 2024, in part due to a weakening consumer spending environment and slower-than-expected demand growth in Asia. The company reports its revenue in three geographic regions — 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, sales in the Asia Pacific region fell 6% year over year, primarily due to lower demand for prestige cosmetics in mainland China. Not only has Estée Lauder seen lower sales recently, but its operating margin shrank from 18.6% in 2021 to 10% in 2024. Its profitability was also hurt by higher input costs and higher marketing expenses, among other factors.

Looking ahead, we expect a rebound in Asia and travel retail in the coming years, which will bolster the company’s sales growth. While 2025 may see a slow expansion in revenues, growth is likely to resume in the second half of the next calendar year. Now that the US Federal Reserve has lowered interest rates and China has recently announced a series of measures, including rate cuts, to spur economic growth, there is likely to be a positive impact on consumer sentiment in both geographies. This should bode well for Estée Lauder. As demand recovers, profitability should also improve, which will help earnings growth. We believe that short-term risks are already priced into Estée Lauder’s prices, and investors are likely to be better off picking the stock in the current downtrend for solid long-term gains.

While EL stocks seem undervalued, it’s worth seeing how Estee Lauder Colleagues rate on metrics that matter. You will find other valuable comparisons for companies from different industries on Comparisons with peers.

Returns September 2024

MTD (1) 2024

Year to year (1) 2017-24

Total (2) EL refund -5% -40% 24% S&P 500 Return 1% 20% 155% Trefis Enhanced Value Portfolio 1% 14% 750% (1) Returns from 24/09/2024

(2) Cumulative total returns since end-2016.

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