Estee Lauder Looks Pricey After Its 20% Post-Earnings Stock Surge

After its fiscal year 2019 earnings release recently, Estee Lauder (NYSE:EL) saw its stock jump 20% even as the overall market nudged lower due to the ongoing trade tensions between the U.S. and China. In this article, Trefis analyzes key trends in Estee Lauder’s earnings and highlights the reasons behind the surge in its stock price. Also, we detail why we think Estee Lauder’ stock looks expensive after the sharp rally. You can also find more of our Consumer Discretionary sector data here.

A Quick Look at Estee Lauder’s Revenues

Estee Lauder reported $14.8 billion in Net Sales for the fiscal year 2019 (Estee Lauder’s fiscal year ends in June). This includes four revenue streams:

• Skincare: $6.6 billion in FY2019 (44% of Net Sales). The segment comprises of all skincare products such as moisturizers, serums, cleansers, etc. under the company’s brand portfolio.
• Makeup: $5.9 billion in FY2019 (39% of Net Sales). The segment comprises of all makeup products such as lipsticks, lip glosses, mascaras, etc. under the company’s brand portfolio.
• Fragrance: $1.8 billion in FY2019 (12% of Net Sales). The segment comprises of all fragrance products such as perfumes, aromatic soaps, lotions, etc. under the company’s brand portfolio.
• Haircare: $0.6 billion in FY2019 (4% of Net Sales). The segment comprises of all hair care products such as shampoos, conditioners, colors, etc. under the company’s brand portfolio.

The Rally Was Triggered By Strong Guidance For Fiscal 2020

• In FY2019, Estee Lauder reported $14.8 billion in net sales – up 8.6% over the previous year. Notably, the company had revised its FY19 sales growth estimate from 5-6% in June 2018 to 7-8% in May 2019, and the actual growth rate had exceeded the latest guidance.
• Additionally, the management expects net sales to grow by 9-10% in FY2020; 2 percentage points higher than the figure for FY2019 despite the current uncertain macroeconomic environment.
• The company has consistently beaten earnings estimates over recent years. The management expected a non-GAAP EPS of $3.78-3.85 for FY2018 and the number came in at $4.51. Similarly, in fiscal 2019 the company reported a non-GAAP EPS of $5.34, much higher than the guidance range of $4.92-5.01.
• Moreover, EL’s management expects double-digit growth in non-GAAP EPS for FY2020 to almost $6.
• The strong outlook by the company resulted in the company’s trailing P/E ratio jumping from 31 to 37 within a week of the earnings release. (Note: Trailing P/E ratio has been calculated considering closing share price and full-year non-GAAP EPS on the earnings release date in August.)

Diversified Sales Channels & Growing Emerging Markets Support Guidance, But We Remain Wary of China Headwinds

• Travel Retail and Online channels contributed 23% and 15% of the net sales in fiscal 2019, respectively. Both these channels reported double-digit growth in 2019.
• More importantly, 70% of Estee Lauder’s business comes from the Asia Pacific and EMEA regions, which reported 21% and 15% growth in 2019, respectively.
• However, considering the expected headwinds in Travel Retail as well as in China over coming months, we expect net sales to grow by 8% to $16 billion as opposed to the higher guidance by the company’s management.

Considering Estee Lauder’s revenues (shows key revenue components) of $16 billion for 2020, we estimate a non-GAAP EPS of $5.87. This EPS figure coupled with a forward P/E multiple of 32.5, works out to a price estimate of $192 for Estee lauder’s stock (shows cash and valuation analysis), which is roughly 5% below the current market price.

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