Time To Sell Estee Lauder Stock?

Up more than 75% since March, we believe Estee Lauder stock (NYSE: EL) could see significant downside. Estee Lauder stock is up 23% so far this year. It traded at $213 in February 2020 – just before the outbreak of coronavirus – and is currently 20% above that level as well. Further, with makeup and fragrance demand still not back up to pre-Covid levels, demand for the company’s products will remain low in the near to medium term, and the stock has the potential to drop around 15% to its pre-Covid levels. Our conclusion is based on our comparative analysis of Estee Lauder stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 65% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how EL stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

EL and S&P 500 Performance Over 2007-08 Financial Crisis

We see EL stock declined from levels of around $25 in September 2008 (pre-crisis peak) to levels of around $11 in March 2009 (as the markets bottomed out), implying EL stock lost 54% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $24 in early 2010, rising by 113% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

EL Fundamentals Over Recent Years

EL revenues increased from $11.3 billion in 2016 to $14.3 billion in 2020 (EL’s fiscal year ends in June), due to higher revenue across all segments. Along with higher revenue, earnings also increased from $3.01 in 2016 to $4.91 in 2019, but dropped to $1.90 in 2020 as the pandemic hurt revenues and net income.

Does EL Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

EL’s total debt rose from $3.4 billion in 2017 to $4.9 billion in 2020, but its total cash jumped from around $1.7 billion to $5 billion over the same period. Further, the company generated over $2 billion cash from operations in fiscal 2020. Strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., and the continuing work from home trend, we see demand for the broader makeup and fragrance sector staying weak in the near term. We believe that Estee Lauder stock has some potential downside in the near term, and even as the lockdowns are gradually lifted, many companies are opting to continue letting employees work from home, making a quick turnaround in makeup demand seem unlikely. This could see EL stock potentially drop 15% from its current level.

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