Initially, cosmetics giant Estee Lauder (NYSE:EL) might not appear as a compelling investment opportunity. With soft performances in the market and a ho-hum earnings report recently, EL stock seems challenged. However, social normalization trends (people returning to offices, going out more, etc.) stand poised to boost Estee Lauder above the muck. Therefore, I am bullish on the beauty care company.
From the company’s most recent fiscal second-quarter earnings report, investors would be forgiven for doubting the viability of EL stock. Primarily, the company reported net sales of $4.62 billion, a decline of 17% from $5.54 billion in the year-ago period. Also, organic net sales fell 11%, according to Estee Lauder’s accompanying press release.
“In the fiscal 2023 second quarter, the evolution of the COVID-19 environment, including restrictions in mainland China and the rising number of COVID cases (collectively “COVID-related impacts”), led to stronger headwinds as the quarter progressed,” management declared.
As a result, the company stated that “tourism and product shipments to Hainan remained largely curtailed and traffic in brick-and-mortar in the rest of China was limited. These challenges were partially offset by broad-based strong organic net sales growth across developed and emerging markets globally.”
Encouragingly for EL stock, however, the underlying enterprise recently represented a highlight for unusual stock options volume. Specifically, following the close of the March 9 session, options volume for Estee Lauder reached 14,715 contracts, which was 452% higher than the trailing one-month average volume.
Significantly, call volume (which has bullish implications) hit 14,373 contracts against put volume of only 342. Options aside, though, the fundamental catalyst of social normalization trends may lift EL stock higher, going forward.
Bolstering the bull case as well, on TipRanks, EL stock has an 8 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
EL Stock May Rise on the Return of Business as Usual
During the worst of the COVID-19 crisis, the fundamental narrative for Estee Lauder wasn’t particularly attractive. Obviously, the fear of coming into contact with the SARS-CoV-2 virus kept people socially distanced and isolated. That’s not a great framework for EL stock. As well, mass-scale remote operations mostly reduced the incentive to look presentable. However, times are changing, making the beauty care industry attractive.
Perhaps most powerfully, fears of COVID-19 began fading sharply in 2022. Today, concerns about SARS-CoV-2 are practically non-existent if observations about large public events are anything to go by. And with that, many companies began recalling their employees back to the office.
To be sure, many workers complained bitterly, which is understandable. Like it or not, though, companies do have a right to demand in-office operations, mainly for accountability. If humans can be trusted to follow the rules when no one’s looking, no need would exist for traffic cops. However, that’s obviously not the case, which suggests investors should expect millions to return to their cubicles.
If so, such a dynamic would likely be a boon for EL stock. While not dismissing China-related headwinds, the tailwind of social normalization would probably overcome the collective negativity. In turn, when employers force their workers to come back, this circumstance will incentivize beauty care products.
Also, with companies continuing to lay off their workers, rank-and-file employees can’t afford to stick out unfavorably. Sure, the labor market is still tight. However, fewer desirable jobs may be available moving forward, causing people to tow the corporate line. Ultimately, this should help EL stock.
Speculation for the Long Haul
Based on analyst estimates, EL stock trades at a forward earnings multiple of 32.8. Compared to other companies in the broader consumer packaged goods industry, EL ranks worse (higher) than 85.53% of the competition. However, with enough patience, the cosmetics giant could benefit stakeholders.
Again, as social normalization trends continue, the addressable market for Estee Lauder should expand. If so, EL stock stands on fairly solid ground. For instance, EL’s three-year revenue growth rate of 6.6% ranks better than 56% of its competitors. Also, its book growth rate during the same period stands at 8.8%, outpacing 64.9% of its rivals.
Regarding profitability, Estee Lauder really comes alive. Primarily, its operating margin pings at nearly 16%, above approximately 86% of the industry. Also, its net margin is 9.13%, better than 77.7% of sector peers. Finally, the company enjoys decent stability regarding its balance sheet. Particularly its Altman Z-Score (a solvency metric) of 5.92 indicates very low bankruptcy risk.
Is EL Stock a Buy, According to Analysts?
Turning to Wall Street, EL stock has a Strong Buy consensus rating based on 18 Buys, three Holds, and one Sell rating. The average EL stock price target is $291.41, implying 22.8% upside potential.
The Takeaway: EL Stock Just Needs Some Time
Understandably, at the present juncture, EL stock doesn’t particularly seem compelling. A combination of financial challenges and poor chart performance clouds the narrative. However, Estee Lauder’s addressable market may expand due to social normalization trends. Therefore, forward-looking speculators should carefully monitor EL.