It's curious. While analysts are firmly bullish on cosmetics outfit Estee Lauder (EL 1.70%), investors aren't. Its shares are down by more than half from their early 2022 high -- and touched another new 52-week low late last month. The company is not careening off a cliff. It's just that nothing seems to be working firmly in its favor. The relative lack of tourist travel from China has been a particular sore spot.
However, the market's been so excessively bearish about Estee Lauder that the stock may now be ripe for an unexpected rebound.
Estee Lauder stock is primed for a rebound
It's typically categorized as a cosmetics company, but that description doesn't quite do Estee Lauder justice. It would be more accurate to describe it as a total skincare outfit, with products and brands well beyond Lauder's glamour looks. NIOD (skincare), Bumble and bumble (hair products), and Aramis (fragrances) are just some of the brands in its lineup.
This diversity hasn't helped much of late, mostly because the cosmetics industry is shifting. The core of its target market is decreasingly interested in the mainstream brands featured in most brick-and-mortar stores, and is instead looking for something else -- anything else. Many of these alternatives are promoted and sold online via campaigns featuring social media influencers rather than traditional advertising campaigns. Think InnBeauty, Kylie (Jenner) Cosmetics, or Milk Makeup; the fact that you probably haven't heard of most of them is somewhat the point.
The thing about the world's biggest and best-funded cosmetics companies is that they don't simply stand back and accept defeat. They adapt.
Take March's launch of The Clinique Lab as an example. The Lauder-owned cosmetics brand's virtual platform allows users to digitally test out various Clinique offerings, perhaps steering them to a physical purchase. The technology also connects the company with new potential customers.
A reformulated version of a skin cream called La Mar -- another Estee Lauder brand -- was also launched in March. This version includes moisture spheres that, the company asserts, improve skin exactly where and how it's needed the most. To some consumers, such changes may seem minor. To the beauty market's best customers, though, these little things can mean a lot.
Then there's a trend you might not expect to have an impact on the cosmetics business -- the recovery of tourism. Globetrotting travelers account for a notable share of the foot traffic to Estee Lauder's stores and counters. Data from travel research firm Skift suggests that 14 of the world's 22 major destination nations are already back to pre-pandemic travel levels, and the remainder are not too far behind.
Meanwhile, the United Nation's World Tourism Agency reports hotel bookings on all continents and regions except for Central and Western Europe and Africa -- the clear weak spot in Estee Lauder's most recent quarterly report -- are also at or beyond pre-pandemic norms. And even so, demand for hotel stays in these markets is trending in a positive direction.
We're even seeing hints of the long-awaited (and somewhat overdue) recovery in travel among China's residents. "During the first quarter of 2023, there has been an upsurge in both domestic and outbound travel activities in China," said James Liang, executive chairman of Chinese online travel agency Trip.com, in June.
Connect the dots. Consumers are coming back. They're likely ready to spend on the types of goods they've not been buying much of for a while now.
The kicker: Last year's sharp rise in the value of the U.S. dollar meant that it cost more for foreign buyers to purchase Lauder's goods. Although the greenback is still above its long-term norms, its value relative to other currencies is easing back from last year's frothy peak.
Now, we play the waiting game
Is Estee Lauder an ironclad, bulletproof pick? No. It's still a huge company competing with hundreds of smaller, nimbler players, each of which is effectively engaging in the business world's equivalent to guerilla warfare. Collectively, their efforts are taking a toll on the giant. Lauder would do well to at least partially change its tack to fight for whatever market share it may be losing -- or at least not gaining.
Even then, however, the analyst community sees something the crowd doesn't. According to the consensus view, Estee Lauder's sales should grow by nearly 10% next year, offsetting this year's decline of about the same amount, and driving expected earnings per share from $3.37 in fiscal 2023 to $5.00 per share in 2024. Analysts see a similar pace of growth all the way through 2028.
Data source: StockAnalysis.com. Chart by author.
This same analyst crowd also thinks Estee Lauder shares will be trading for nearly $226 apiece in 12 months. That's more than 25% higher than the stock's current price.
Granted, analysts can sometimes be wrong. That seems the less likely case here, however. It's more plausible that this stock has been such a poor performer of late because it's been difficult to reverse the bearish narrative. As is often the case in such instances, the sellers overshot their target, leaving the stock even more primed for a bounce.
The tricky part will be holding onto this volatile stock while waiting for rekindled reported growth to provide the catalyst for a sustained rebound.
