Why You Shouldn’t Be Buying Estee Lauder Companies Stock

We believe there are several things to fear in EL stock given its overall Weak operating performance and financial condition. But keeping in mind its Very High valuation, we think that the stock is Very Unattractive. Here is our multi-factor assessment.

But no matter how attractive, investing in a single stock carries high risk. Trefis High Quality Portfolio and is designed to reduce stock-specific risk while giving upside exposure

Let’s get into details of each of the assessed factors but before that, for quick background: With $32 Bil in market cap, Estee Lauder Companies provides a wide range of skin care, makeup, fragrance, and hair care products globally, including moisturizers, serums, cleansers, perfumes, lotions, and cleansing devices.

[1] Valuation Looks Very High

This table highlights how EL is valued vs broader market. For more details see: EL Valuation Ratios

[2] Growth Is Very Weak

• Estee Lauder Companies has seen its top line shrink at an average rate of -6.8% over the last 3 years
• Its revenues have fallen -8.2% from $16 Bil to $14 Bil in the last 12 months
• Also, its quarterly revenues declined -11.9% to $3.4 Bil in the most recent quarter from $3.9 Bil a year ago.

This table highlights how EL is growing vs broader market. For more details see: EL Revenue Comparison

[3] Profitability Appears Very Weak

• EL last 12 month operating income was $1.1 Bil representing operating margin of 8.0%
• With cash flow margin of 8.9%, it generated nearly $1.3 Bil in operating cash flow over this period
• For the same period, EL generated nearly $-1.1 Bil in net income, suggesting net margin of about -7.9%

This table highlights how EL profitability vs broader market. For more details see: EL Operating Income Comparison

[4] Financial Stability Looks Strong

• EL Debt was $9.5 Bil at the end of the most recent quarter, while its current Market Cap is $32 Bil. This implies Debt-to-Equity Ratio of 30.0%
• EL Cash (including cash equivalents) makes up $2.9 Bil of $20 Bil in total Assets. This yields a Cash-to-Assets Ratio of 14.7%

[4] Downturn Resilience Is Weak

EL has fared worse than the S&P 500 index during various economic downturns. We assess this based on both (a) how much the stock fell and, (b) how quickly it recovered.

2022 Inflation Shock

• EL stock fell 71.9% from a high of $371.86 on 4 January 2022 to $104.51 on 1 November 2023 vs. a peak-to-trough decline of 25.4% for the S&P 500.
• The stock is yet to recover to its pre-Crisis high
• The highest the stock has reached since then is $157.94 on 13 March 2024 , and currently trades at $87.46

 
2020 Covid Pandemic

• EL stock fell 34.3% from a high of $219.88 on 17 January 2020 to $144.38 on 23 March 2020 vs. a peak-to-trough decline of 33.9% for the S&P 500.
• However, the stock fully recovered to its pre-Crisis peak by 28 August 2020

 
2008 Global Financial Crisis

• EL stock fell 62.9% from a high of $26.87 on 8 September 2008 to $9.97 on 9 March 2009 vs. a peak-to-trough decline of 56.8% for the S&P 500.
• However, the stock fully recovered to its pre-Crisis peak by 1 February 2010

But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read EL Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.

The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – S&P 500, Russell, and S&P midcap. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.