Down 20% This Year Already, Is Estee Lauder Stock Headed For Another 20% Slump?

by Trefis Team
Estee Lauder
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Having already declined ~20% since the beginning of this year, at the current price of around $165 per share, we believe Estee Lauder (NYSE: EL) could see further downside.
Why is that? The key is Estee Lauder’s stock is still up around ~30% since the beginning of 2018, a little over 2 years ago.
Our dashboard Why Estee Lauder Stock moved 32.8% provides the key numbers behind our thinking, and we explain more below.

Some of this rise of the last 2 years is justified by the roughly 25% growth seen in Estee Lauder’s revenues from 2017 to 2019, which combined with a 13% growth in net margins, translated into a 43% growth in Net Income (earnings margin rose steadily in 2018 and 2019). This, combined with a 1% drop in share count, led to a further 44% growth in earnings, on a per share basis.

Finally, Estee Lauder’s P/E ratio rose steadily from about 36x at the end of 2017 to 42x at the end of 2019. While Estee Lauder’s P/E is already down to about 33x now, given the volatility of the current situation, there is significant additional possible downside for Estee Lauder’s stock price when compared to levels seen in the past years – $124 at the end of 2017, and $128 as recent as in late 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there could be a drop in cosmetic product sales, given that in-store operations have more or less come to a standstill, and in many countries under lockdowns, online sales of cosmetics will take a hit as well. Further, given the current scenario where people are not leaving their houses as much, the need for makeup and cosmetic products has taken a backseat. We believe Estee Lauder’s Q3 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as well as 2020 guidance.

If there isn’t a clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline further from the current levels of 33x, and combined with a reduction in revenues and margins, this could result in the stock price shrinking to as low as ~$125.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture, and complements our analyses of Coronavirus impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

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