My Top Stock to Buy After Its Post-Earnings Plunge

The Estée Lauder Companies (EL 1.70%) stock reached a fresh five-year low on Nov. 2 after slashing its fiscal 2024 guidance. And even after recovering some of those losses on Friday, the stock is down a staggering 55.3% year to date.

Here's how Estée Lauder went from a growth story to a massive disappointment, and why now could be a great time for long-term investors to step in and buy the cosmetic stock.

Image source: Getty Images.

Where Estée Lauder went wrong

In the 10-year period between fiscal 2014 and fiscal 2023, Estée Lauder grew revenue by 74%, thanks to a simple yet highly effective strategy.

Estée Lauder has a diversified portfolio of skin care, fragrance, makeup, and hair care brands. It has a track record of successfully acquiring and developing new brands, along with its core existing brands. In addition to the flagship Estée Lauder label, the company owns several highly popular brands such as Tom Ford Beauty, The Ordinary, M.A.C., Le Labo, Clinique, Jo Malone, La Mer, and more.

Estée Lauder bet big on China and international travel through the duty-free sections at airports. The vast majority of folks who are traveling pass through those shopping areas without a second thought. But the sheer volume of exposure proved to be a highly effective growth driver for the company.

Lately, Estée Lauder's growth has ground to a halt. Chinese travel restrictions combined with overall macroeconomic conditions have left the company overextended. One of the best ways to see this dynamic at work is by looking at Estée Lauder's revenue, operating income, net income, and operating expenses.

EL Revenue (TTM) data by YCharts

As you can see in the chart, Estée Lauder's revenue has increased just 9.2% over the last three years, while its operating expenses are up 13.5%. Low sales growth paired with higher expenses have wreaked havoc on the company's operating income, and in turn, its net income, which are both down over 40% in the last three years.

A bleak outlook

Worst of all, Estée Lauder's results aren't expected to improve anytime soon. The company is guiding for negative 2% to positive 1% sales growth and just $2.08 to $2.35 in 2024 earnings per share (EPS). For context, Estée Lauder earned $2.79 in diluted EPS in fiscal 2023, $6.55 in fiscal 2022, an all-time high of $7.79 in fiscal 2021, and $1.86 in fiscal 2020 when the business collapsed under the weight of the COVID-19 pandemic.

The fact that the low end of Estée Lauder's projected fiscal 2024 earnings is close to what it earned during the worst of the pandemic illustrates the staggering deterioration of its fundamentals, at least in the short term.

Ripping off the proverbial bandage

Estée Lauder expects to return to net sales growth and operating margin improvements in the second half of fiscal 2024 as mainland China rebounds and the Asia travel business picks up. From there, it is staging a Fiscal 2025 and Fiscal 2026 recovery plan built around improving operating margins through cost-cutting efforts and better efficiency. It expects to achieve $800 million to $1 billion in incremental operating profit as a result of the plan.

For Estée Lauder's recovery to be a success, it needs to see a rebound in key markets. But it also needs to successfully reduce costs. Any time a company is embarking on a restructuring, it's a mistake to assume that everything will go as planned. Often, cost cuts come in less than expected, or can take longer than expected. And some investors may prefer to sell the stock instead of waiting for these measures to take shape, which is exactly what has been driving the brutal sell-off this year.

However, I would much rather see a company put all the negatives out in the open ahead of time than limp along and continue to disappoint investors quarter after quarter.

It's worth mentioning that Estée Lauder could have either not given guidance at all, or just given second-quarter fiscal 2024 guidance. Instead, it gave its full-year fiscal 2024 guidance and a profit recovery plan for fiscal 2025 and fiscal 2026. And we are only in Q2 fiscal 2024 right now.

Estée Lauder's results have been nothing short of awful. But it is giving long-term investors exactly what they could hope for under the circumstances, which is better clarity on the severity of its problems and a timeline for recovery.

Not a total collapse

On the surface, it looks like Estée Lauder's entire business is in free fall. But in reality, the issue is mainly skin care and its Europe, Middle East, and Africa region.

Data source: Estée Lauder.

Granted, skin care happens to be by far the most important product category. And Europe, the Middle East, and Africa provide more sales than the Americas or Asia/Pacific. But still, it is encouraging to see other aspects of Estée Lauder's business do well.

Why Estée Lauder is a buy

At this point, it's unrealistic to think that Estée Lauder's incredible results in fiscal 2021 or fiscal 2022 are attainable anytime soon. But it's easy to see an outcome where the company can regain its footing at the fiscal 2019 pre-pandemic levels -- a year in which it earned $4.82 per share. At Estée Lauder's current price of around $111 per share, that would give the stock a price-to-earnings (P/E) ratio of around 23 -- which is more than reasonable for a company with the brand portfolio of Estée Lauder.

To cap it off, Estée Lauder has paid a dividend ever since going public, and it has raised its dividend every year since 2012. The stock doesn't have a very high yield -- just 2.4%. But it's still something. And it does provide an added incentive to hold the stock and let the recovery play out.

Estée Lauder benefited from the growth of international travel and the Chinese economy. Now, it is feeling the reverse effects and suffering the consequences of depending so much on international growth. However, it's still an incredibly powerful and diversified company. For investors who believe in Estée Lauder's brands and its ability to turn things around by fiscal 2026, the stock looks like a good buy now.