Estée Lauder – Key Insights as Stock Prices Surge

One of Wall Street's biggest winners of the day is Estée Lauder, a household & personal products company whose shares have climbed 4.6% to a price of $144.43 -- 12.2% below its average analyst target price of $164.5.

The average analyst rating for the stock is buy. EL may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 68.2% over the last year, returning -46.6%.

The Estée Lauder Companies Inc. manufactures, markets, and sells skin care, makeup, fragrance, and hair care products worldwide. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

Estée Lauder's trailing 12 month P/E ratio is 112.8, based on its trailing EPS of $1.28. The company has a forward P/E ratio of 33.9 according to its forward EPS of $4.26 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.96, and the average for the S&P 500 is 15.97.

EL’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Estée Lauder, we obtain a PEG ratio of 2.93, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To better understand the strength of Estée Lauder's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023 15,910,000 9,837,000 9 -50.0
2022 17,737,000 10,262,000 18 12.5
2021 16,215,000 9,763,000 16 300.0
2020 14,294,000 10,136,000 4 -75.0
2019 14,863,000 9,163,000 16 6.67
2018 13,683,000 8,784,000 15
  • Average operating margins: 13.0 %
  • Average operating margins growth rate: -10.3 %
  • Coefficient of variability (lower numbers indicate less volatility): 1158.87 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Estée Lauder's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 1,731,000 1,003,000 728,000 -63.6
2022 3,040,000 1,040,000 2,000,000 -33.2
2021 3,631,000 637,000 2,994,000 80.69
2020 2,280,000 623,000 1,657,000 -6.54
2019 2,517,000 744,000 1,773,000 -8.28
2018 2,562,000 629,000 1,933,000
  • Average free cash flow: $1.85 Billion
  • Average free cash flown growth rate: -17.0 %
  • Coefficient of variability (the lower the better): 0.0 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in EL have received an annualized dividend yield of 1.9% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Estée Lauder's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 9, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 4.24 as of the first quarter of 2023.

Estée Lauder is by most measures overvalued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and positive cash flows with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of EL's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.