Is Estée Lauder Stock Finally a Buy?

When a blue-chip beauty giant like Estée Lauder hits its lowest point in a decade, it’s worth asking whether it’s a falling knife or a bargain?

The company behind MAC, La Mer, and other luxury beauty staples has watched its stock crater 55.4% this year alone. Ouch.

Just think about it, for a stock to sink this low, investors aren’t just walking away, they’re sprinting. And maybe for good reason because Estée Lauder’s numbers tell a pretty grim story lately with sales shrinking and profits going up in smoke even faster. Put those two into the mix and confidence in the company’s future seems to be wearing off like last night’s makeup.

But here’s the million-dollar question. Is this iconic beauty brand just going through an ugly phase, or is this the beginning of a permanent decline? As any smart shopper knows, sometimes the best deals come when everyone else is panicking. Then again, sometimes things are cheap because they’re headed for the clearance bin.

Let’s dig into what’s really happening with this fallen beauty queen and figure out if there’s still some magic left in the bottle.

The Numbers That Made Me Spit Out My Coffee

Get a hold of this surprise, makeup, which everyone thinks is Estee Lauder’s bread and butter, only accounts for 28% of their sales.

Skincare leads the pack. That’s not quite but almost like finding out Coca-Cola makes most of its money from bottled water – it changes how you think about the business.

And here’s the kicker, R&D spending is a measly $360 million compared to L’Oréal’s 1.29 billion euros. In an industry where innovation is everything, they’re bringing a knife to a gunfight. 

Puzzle That Has Investors Scratching Their Heads

Only 29.3% of their revenue comes from the Americas. For a company whose products are seen in every high-end department store from Maine to California, that number should probably stop you in your tracks.

It means they’re heavily dependent on international markets, which explains why they’re feeling the pinch so severely, particularly from Chinese consumer weakness.

So, what should investors do about the selloff?

Usually, when we see a quality dividend-payer take a 47% hit, the value investing spidey-sense starts tingling. But something seems different here.

I keep coming back to Shiseido’s numbers. They’ve got roughly the same challenges but seem to be navigating them better. When you compare EL’s operating trends to peers like Unilever and L’Oréal, you don’t see the resilience you might expect from a true dividend aristocrat.

Sometimes Cash Isn’t King

That 2.16% dividend yield looks mighty tempting in a sector where dividends are as rare as empty parking spots at the mall during holiday season. But tried and tested investors have learned the hard way with Avon that a good yield can turn into a yield trap faster than you can say “earnings miss.”

For now, it seems best to keep EL on a watch list right next to your notes from the great consumer staples washout of 2008. The difference is, back then we had a better sense of when to pounce. This time, we’re still waiting for signs that management has a real plan beyond maintaining that dividend.

Until investors see their R&D spending catch up with the times or their geographic revenue mix start making more sense, staying on the sidelines seems like the prudent bet. Sometimes the hardest thing in dividend investing is admitting that a falling knife might not have hit the floor yet, even when it’s got a yield that makes your mouth water.

Do analysts agree?

Is Estée Lauder Stock Finally a Buy?

Among 27 analysts covering Estee Lauder stock, it is a buy with upside to $80.48 per share. That’s pretty meaningful upside of 19.3% from present levels but there’s more to the story than meets the eye.

While analysts have a high price target on the stock, they also have downgraded the stock in spades. 23 analysts revised their earnings estimates lower over the coming quarter.

And with profitability aloof, the price-to-earnings ratio of 114x is sky high and suggests risks are very elevated at this time.

Yes EL generates revenues of $15 billion but net income of $217 million is concerning and the extremely high payout ratio calls into question the merits of continuing to pay a yield at all. If that goes up in smoke, expect further declines for EL share price.

So, while Estee Lauder stock is technically oversold and fundamentally appears undervalued according to the calculations from analysts, it also is fraught with risk and should be treated accordingly.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.