Recovering Demand Could Drive Estee Lauder Stock To Fresh Highs

Despite rising almost 2x from its low in March 2020, at the current price near $296 per share, we believe Estee Lauder stock (NYSE: EL) has further upside potential. Estee Lauder stock has jumped from $150 to $296 off its recent bottom, a little more than the S&P which increased by over 80% from its lows. Further, the stock is up a little more than 1.4x from the level it was at before the pandemic. However, we believe that Estee Lauder stock could set new highs above its recent April 2021 high of $318, rising around 10% from its current level, driven by expectations of strong demand recovery and stellar Q3 2021 earnings. Our dashboard What Factors Drove 133% Change In Estee Lauder Stock Between 2017 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2017-end came due to a 21% rise in revenue from $11.8 billion in FY 2017 to $14.3 billion in FY 2020. However, net margins dropped from 10.6% in 2017 to 4.8% in FY ’20 as the pandemic hurt net margins. Combined with a marginal 2% drop in the outstanding share count, EPS (earnings-per-share) dropped from $3.40 in 2017 to $1.90 in 2020.

Estee Lauder’s P/E (price-to-earnings) multiple rose from 37x in 2017 to 140x by 2020 end, and has since risen to 156x. However, we believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 saw work from home becoming the new norm. This hampered demand for makeup and fragrance products, two of Estee Lauder’s cosmetic product segments. However, with the economy opening up and people stepping out more and more now, demand for these products has started rising again. This is evident from Estee Lauder’s strong Q3 2021 earnings, where revenue jumped to $3.86 billion vs $3.35 billion for the same period in FY 2020. Further, with lower operating expenses and a significantly lower impairment charge ($33 million in Q3 ’21 vs $346 million in Q3 ’20), operating margins rose from 3.3% to 15.9% over this period. This led to EPS rising from -$0.02 to $1.25.

Further, demand growth for cosmetic products is expected to continue in the medium term, driving demand for Estee Lauder’s products even higher. We believe the company will see strong revenue and margin growth. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Estee Lauder’s stock can rise around 10% from current levels, to set new highs above $318.

While Estee Lauder stock may be undervalued, it is helpful to know how its peers stack up. Estee Lauder Stock Comparison With Peers summarizes how Estee Lauder compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams