SHENZHEN, GUANGDONG, CHINA – 2019/10/05: American multinational personal care and makeup products … [+]
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Estee Lauder stock (NYSE: EL) is down around 7% since the beginning of this year, and at the current price of around $195 per share, we believe Estee Lauder stock has a significant downside.
Why is that? Our belief stems from the fact that Estee Lauder’s stock remains about 54% higher than the low seen in early 2018. Our dashboard What Factors Drove 54% Change In Estee Lauder Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
Some of this rise over the past 2 years is justified by the roughly 25% growth seen in Estee Lauder’s revenues, which translated into a further 43% growth in Net Income, largely due to lower operating expenses. This combined with a 1% drop in outstanding share count (total share buybacks of over $1.5 billion) led to a 44% growth in earnings on a per share basis.
Finally, Estee Lauder’s P/E ratio rose from about 36x at the end of 2017 to 42x recently. While Estee Lauder’s P/E has dropped to 39x now, given the volatility of the current situation, there is a significant additional possible downside for Estee Lauder’s multiple when compared to levels seen in the past years – P/E of 26x at the end of 2016, and 36x as recently as 2017.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus, and the resulting lock downs and quarantine has meant there is much lower demand for makeup and cosmetics right now, as people are just not stepping out enough. In addition, there have likely been supply disruptions in many countries from the global Coronavirus crisis. We believe Estee Lauder’s Q4 results in July will confirm the hit to its revenue. It is also likely to accompany a lower 1H-2021 guidance.
If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from current level of 39x to around 31x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $145.
For more insights into how Covid-19 has impacted Estee Lauder’s personal products peer Kimberly-Clark, view our interactive dashboard 2007-08 vs. 2020 Crisis Comparison: How Did Kimberly-Clark Stock Fare Compared With S&P 500?.
Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here