Estee Lauder stock analysis: fallen angel gets oversold

Estee Lauder (NYSE: EL) stock price has continued to lag behind the Nasdaq 100 and S&P 500 indices this year. It has crashed by over 35% this year as the two indices are hovering near their all-time highs. It is down by over 75% from its highest point on record.

Estee Lauder is facing headwinds

Estee Lauder, the parent company of well-known brands like Aveda, Aerin, Clinique, Bobbi Brown, and Jo Malone, is one of the biggest players in the beauty industry. 

While its brands are well-known, the company is facing substantial headwinds as competition increases, inventories remain elevated, and consumer spending slows. 

The company is now competing with many smaller companies that are leveraging technology to gain market share. ELF, one of these companies, has done well as its stock has jumped by over 30% in the last 12 months.

It is also competing with other celebrity-backed companies. The most popular names are the likes of Fenty Beauty, which is now valued at over $2.8 billion and Kylie Jenner’s firm, which is valued at over $900 million.

Estee Lauder is not the only company in the sector going through a rough patch. In France, L’Oreal Paris stock has dropped by more than 16% from its highest point this year. Similarly, in Japan, Shiseido’s stock is down by over 30% from the year-to-date high and by almost 60% from its all-time high.

Estee Lauder’s business has slowed in the past few years. For example, its annual revenue dropped from over $17.7 billion in 2023 to $15.9 billion in 2023 while its annual profits tumbled to their lowest level in years. It made a profit of just $1 billion, down from over $2.3 billion a year earlier.

In addition to weak fundamentals, the company has gone through other internal issues. Primarily, the Lauder family is divided, with one side, led by Leonard Lauder, are dissatisfied with Fabrizio Freda, the CEO. 

On the other side, some members, including his son, William, wants him to continue, a position that may not be tenable if the stock continues falling.

Estee Lauder’s earnings ahead

Estee Lauder will be in the spotlight next week when it publishes its quarterly results on Monday. These results will provide more colour about the state of the company and whether the turnaround strategy is working.

The most recent results showed that the company’s total sales rose by 5% in the three months to March 31st to $3.94 billion. Most of this growth was because of its skincare business whose sales rose by 8% to $2 billion. Its makeup business grew by 3% while the hair care segment dropped by 3%.

A key challenge for Estee Lauder is that its Chinese business is no longer growing as locals become more conservative. Its Asia Pacific region’s revenue retreated by 1% to $1.17 billion while the Americas and EMEA rose. 

Analysts expect Estee Lauder’s earnings to show that its revenue rose by 5.5% in the last quarter to $3.83 billion. For the year, the company’s sales are expected to come in at $15.58 billion, down by 2.30%. 

The other estimate is that its earnings will come in at $0.27, up from $0.07 in the previous year. Also, the annual estimate is that the EPS will be $2.23, down from $3.46 a year earlier. 

Estee Lauder has other challenges. Its cash and equivalents moved from $5.5 billion in March 2023 to $3.7 billion in March this year as the company worked to refresh its brand. Its total current assets narrowed from $11.24 billion to $8.5 billion. 

It has also borrowed more, pushing its long-term debt to over $7.2 billion. Some of these borrowings went to acquire DECIEM, a Canadian company. On the positive side, it has reduced its inventory levels to $2.3 billion. 

Another risk is that the company’s free cash flow is not growing, meaning that its dividend could be at risk. In the past, its dividend payouts costs it about $950 million and has a dividend payout ratio of 130%. This means that, unless situations improve this year, the company may be forced to adjust its payouts.

The other positive is that Estee Lauder is still a well-known brand and a good turnaround strategy could help it bounce back. A good step would be to replace its CEO, as we saw with Starbucks this week.

Estee Lauder stock price analysis

The weekly chart shows that the EL share price has been in a strong freefall in the past few months. Most recently, the stock crashed below the key support level at $113.73, its lowest point in October last year. 

The stock has remained below all moving averages, meaning that sellers are in control. Oscillators like the the Relative Strength Index (RSI) and the Stochastic have moved below the oversold level.

Therefore, while the outlook is downwards, there are some catalysts that could push it higher. The most important would be a CEO change while the other one will be a surprisingly good quarterly report on Monday.

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