Estée Lauder
is having problems—big problems—with everything from sales in Asia to shrinking profit margins. Now, an activist investor is making some noise with an obvious fix. If the cosmetics company’s problems begin to get resolved, the stock could pop.
Barron’s picked Estée Lauder stock (ticker: EL) in July 2022—and it hasn’t gone well. Shares are down 21% since then, with much of the weakness stemming from macroeconomic concerns that the company has no control over, including mobility restrictions in China and a higher U.S. dollar.
We’ve been here before. Similar issues weighed on the company’s outlook in November, and the stock dropped to just under $200. We recommended scooping up shares then because of the long-term sales and earnings growth opportunities in China and in e-commerce sales. After the November problems, they rose back above $270.
Still, Wall Street is growing impatient with the company’s ability to navigate choppy waters. And with the stock now back below $200—it closed at $190 on Wednesday—billionaire hedge fund investor Nelson Peltz, founder of Trian Partners, is calling for the ouster of CEO Fabrizio Freda.
On the surface, the criticism seems a touch unfair. During its most recent quarter, Estée Lauder reported earnings of 47 cents a share, missing estimates for 51 cents, which the company blamed on a higher-than-expected tax rate. It also lowered its sales guidance for fiscal 2023, which ends in June, to $15.8 billion at the midpoint, down from a previous forecast of $16.7 billion.
The company blamed the dimmer view on a slower-than-expected recovery in travel in certain areas of China, but there were also worries about its ability to get travelers to spend. More problematic, while gross margin remained near 70% in 2021, operating margins fell to 12% from 19%, a sign that the company hasn’t done much to keep its costs in check.
And that’s where Trian and others see the most opportunity to turn Estée Lauder around. “They should be cutting costs, streamlining plans, doing other things to help that operating margin number—that’s the whole Nelson Peltz argument,” says Stephanie Link, chief market strategist and portfolio manager at Hightower.
Cutting costs, of course, has worked wonders for Facebook parent
Meta Platforms
(META) and other tech companies, and there’s a good chance that it will work for Estée Lauder, too. Travel in Asia should rebound, despite worries about a Covid-19 resurgence in China, while sales, margins, and earnings recover. Meanwhile, the stock is trading at 30.5 times calendar-year 2024 earnings-per-share estimates of $6.19, expensive relative to the
S&P 500
index’s 18.1 times but below its five-year average of 35.
The question now is whether Estée Lauder will do the obvious thing by following through on some of Peltz’s recommendations. “There’s going to be a huge tailwind for them if they can get these things fixed,” Link says. “Definitely buying on the dip, but you’ve got to have a caveat saying this is not a one-quarter fix.”
The stock isn’t for the faint of heart, but there’s plenty of upside for patient investors.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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