What’s The Downside For Estee Lauder Stock?

Estee Lauder stock (NYSE: EL) is up 6% since the beginning of this year, but at the current price of around $218 per share, we believe that Estee Lauder stock has 10% potential downside.

Why is that? Our belief stems from the fact that Estee Lauder stock is still up almost 70% from the low seen at the end of 2018, almost 2 years ago. Further, after posting weak Q4 and full-year 2020 numbers, and with makeup and fragrance demand still not up to pre-Covid levels, we believe Estee Lauder’s stock could drift lower. Our dashboard What Factors Drove 69% Change In Estee Lauder Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Estee Lauder stock’s rise since late 2018 was helped by a 5% rise in revenue, which combined with a 2% decrease in outstanding share count, led to a 7% rise in revenue per share (RPS).

In addition, Estee Lauder’s P/S ratio rose from 3.4x in 2018 to 5x in 2019, and has further jumped to 5.5x currently. However, given the volatility of the current situation, there is possible downside risk for Estee Lauder’s multiple, especially when compared with previous years multiple – 3.4x in 2018 and 5x in 2019.

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

The global spread of Coronavirus and the resulting lockdowns have hampered demand for beauty products. With people not stepping out as often, makeup and fragrance products have seen a drop in demand. However, demand for hair and skin care products hasn’t taken as bad a hit, but the combined effect of these two factors is evident from Estee Lauder’s full-year 2020 earnings. Revenue came in at $14.3 billion, down from $14.9 billion in 2019, and gross margins took a small hit (75% in 2020 vs 77.2% in 2019), as COGS rose to $3.6 billion from $3.4 billion in 2020. However, significantly higher operating expenses saw operating margins come in at 4.2% vs 15.6%, and with the effective tax rate rising to 33.5% from 22.2% in 2019, EPS dropped 61% to $1.90.

Despite the economy gradually opening up, it’s likely that work-from-home will become the new norm, and in that case makeup and fragrance revenue could struggle to get back to pre-Covid levels, at least in the medium term. We believe Estee Lauder’s Q1 2021 results in October will confirm this.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 5.5x to around 5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $190.

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