After a 46% rise since its low in March, at the current price of around $211 per share we believe Estee Lauder stock (NYSE: EL) has reached its near term potential. The stock has crossed the level it was at before the drop in March but in reality, demand and revenues will likely be affected this year. Estee Lauder stock has already rallied from $144 to $211 off the recent bottom compared to the S&P which moved 53%.
Further, EL stock is up about 70% from levels seen at the end of 2017, over 2 years ago. This rise over the past 2 years came due to a 26% increase in EL revenues from 2017 to 2019, which translated into a 43% rise in net income, and a 44% growth in earnings per share (EPS)
Further, its P/E multiple saw an increase from 37x in 2017 to 42x in 2019, and stands at around 43x currently. Additionally, we believe the stock is unlikely to see significant upside after the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 70% Change in Estee Lauder Stock between 2017 and now? has the underlying numbers.
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So what’s the likely trigger and timing for this downside?
The global spread of Coronavirus, and the resulting lock downs and quarantine has led to a drop in demand for makeup and cosmetics right now, as people are just not stepping out enough. Further, the demand for fragrance products will also take a hit. In addition, there have likely been supply disruptions in many countries from the global Coronavirus crisis. We believe Estee Lauder’s Q4 results later this month will confirm the hit to its revenue. It is also likely to accompany a lower 1H-2021 guidance.
Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E decline from the current level of 43x to 40x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to around $190.
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