Down More Than 40% in 2023, This Stock Is a Buy for Contrarians

We’re bullish on this undervalued stock. Here’s why.

Dan Su, CFA 25 October, 2023 | 4:34AM
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Estée Lauder (EL) shares are struggling this year. The leading provider of premium beauty products is experiencing a slower-than-expected recovery in travel retail, especially in China. But Morningstar expects high-single-digit top-line growth by fiscal 2033. 

Estée has fortified its competitive standing with category-leading brands in skincare, cosmetics, and fragrances. It has also retained preferred-vendor status across brick-and-mortar and digital channels.

We see Estée as poised to benefit from premiumization trends, as beauty consumers in developed and emerging markets alike upgrade for perceived better-quality ingredients, efficacy, and service. Outside North America, we view Estée as particularly well positioned in Asia, thanks to highly regarded skincare brands and a newly opened innovation center and factory in the region that should enable it to deliver locally relevant products in a timely fashion. We expect Estée to dial up investments in digital channels and travel retail to complement its strong ties to brick-and-mortar retailers, with the aim of keeping its brands top of mind and easily accessible as beauty users shop across channels.

Economic Moat Rating

We believe Estée Lauder has carved out a wide economic moat thanks to the strong brand equity and entrenched retail relationships associated with its premium beauty products. The company has amassed an impressive stable of top-selling prestige brands, including La Mer, Clinique, Origins, M.A.C., Bobbi Brown, Jo Malone London, Aveda, and its namesake. We also think the company benefits from significant scale in procurement, manufacturing, and distribution. In advertising and marketing, Estee’s US$4 billion annual budget (23% of sales) puts the company among the top 30 advertisers globally in consumer-related products.

Read more about Estée Lauder’s moat rating.

Fair Value Estimate for Estée Lauder Stock

Our fair value estimate implies a 51 times multiple against our adjusted fiscal 2025 earnings estimate and a fiscal 2025 enterprise value/adjusted EBITDA multiple of 28 times. Our forecast for revenue to grow at a 7.3% compound annual rate over the next 10 years is driven by our expectation of steady, mid-single-digit increases in premium beauty demand globally and Estée’s ability to outpace the overall market thanks to its focus on the structurally attractive premium skincare category. We model operating margin to expand to 21.8% at the end of our 10-year forecast period, from 11.1% in 2023. This is driven mostly by gross margin expanding to 77.9% by 2033, from 71.3% in 2023, thanks to a better channel mix and manufacturing efficiency gains.

Read more about Estée Lauder’s fair value estimate.

Risk and Uncertainty

Estée distributes its products in more than 150 countries yet has centralized manufacturing in the United States, Europe, and Japan. As such, it depends on stable trade policies and collaborative global supply chains to ensure timely and cost-effective delivery of its products. In addition, the proliferation of online marketplaces and digital marketing has disrupted the beauty market by lowering entry barriers and accelerating commercialization of new concepts, particularly in makeup.

Read more about Estée Lauder’s risk and uncertainty.

Estée Lauder Bulls Say

  • As a premium beauty pure play, Estée Lauder is best equipped to capture growth opportunities as middle-class consumers upgrade from mass brands.
  • With a new factory in Japan and an innovation center in China, Estée Lauder should be able to better serve consumer needs in the important Asia market with more-relevant products and shorter lead times.
  • Heavy investments in the digital and travel retail channels should complement Estée’s strong position in traditional brick-and-mortar channels to deliver a seamless shopping experience for consumers.

Estée Lauder Bears Say

  • Estée lags key rival L’Oréal in research and development for derma-based skincare products, which are gaining popularity among consumers.
  • Estée remains exposed to struggling U.S. department stores, even after efforts to reduce counters and diversify into other more productive channels.
  • Several of Estée’s cosmetics brands have underperformed in recent years, leaving the company vulnerable to market share loss.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
The Estee Lauder Companies Inc Class A126.06 USD-0.06Rating

About Author

Dan Su, CFA

Dan Su, CFA  Dan Su, CFA, is a senior stock analyst with Morningstar.

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