Estée Lauder (NYSE: EL) reported Q3’24 results last week (the fiscal year ends in June) with revenue and earnings exceeding our expectations. The company’s revenues stood at $3.9 billion and earnings came in at $0.97, compared to our estimates of $3.9 billion and $0.46, respectively. The upbeat performance can be attributed to a rebound in Asia travel. However, the company’s Q4 guidance was below the street expectations, resulting in a 7% fall in EL stock over the last five days. However, after its recent fall, we think that EL stock now has ample room for growth. In this note, we discuss Estée Lauder’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Estée Lauder’s stock performance. EL stock has suffered a sharp decline of 50% from levels of $265 in early January 2021 to around $130 now, vs. an increase of about 40% 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 WMT, PG, and COST, 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 can see higher levels over time. We estimate Estée Lauder’s Valuation to be $155 per share, reflecting around 20% upside from its current levels of $130. Our forecast is based on 4x forward sales, aligning with the stock’s average over the last two years.

Estée Lauder’s revenue of $3.9 billion in Q3 was up 5% y-o-y. The company reported an 8% growth in Skin Care sales, 3% rise in Makeup sales, partly offset by a 3% fall in Hair Care revenues. Fragrance segment sales were flat, y-o-y. This can be attributed to a rebound in Asia travel, with Asia Pacific sales rising 3%. Europe also saw a strong 12% growth, led by increased travel retail business.  The company reported an operating margin of 13.5% in Q3’24, reflecting a solid 560 bps rise y-o-y.  The adjusted EPS stood at $0.97, vs. $0.47 in Q3 2023.

Looking forward, Estée Lauder expects its 2024 sales to fall between 2% and 3% versus 2023, and its adjusted earnings per share to be in the range of $2.14 and $2.24.  This compares with the $3.46 figure it reported in 2023. While the fiscal 2024 outlook missed the street estimates, we think a rebound in Asia travel as well as travel retail will likely result in robust growth in fiscal 2025 and beyond. This, clubbed with the company’s initiative of Profit Recovery Plan to boost margins, should bolster the overall earnings growth. We think investors can pick EL at current levels for robust long-term gains.

While EL stock looks like it has ample 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 5/8/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.