Three Strong Motivations to Invest in Estée Lauder Shares without Delay
After hitting an all-time high in 2022, Estée Lauder's (EL) stock has taken a significant hit, losing around 80% of its value within two years. To add to its woes, the company recently announced a dividend reduction of approximately 47%.
Despite these negative developments, contrarian investors might see this as an opportune moment to explore this renowned fragrance and cosmetics company. Here's why:
1. Estée Lauder thrives in a sought-after niche
Unlike consumer staples manufacturers that cater to essential needs, Estée Lauder specializes in products that gratify customers' desires. As a result, it falls into the category of consumer discretionary stocks. Furthermore, the cost of its high-end offerings might be steep for its specific market, yet they still remain affordable compared to other luxury items.
Even in challenging market conditions, a premium car like a BMW isn't typically bought impulsively. However, that cherished fragrance that you and your partner adore could justify a $100 splurge on a small bottle if you run out.
With a wide range of skin care, hair care, makeup, and perfume brands, Estée Lauder boasts a diverse and internationally diversified portfolio. In the fiscal first quarter of 2025, the company registered sales of nearly $3.4 billion, which is a impressive feat, considering the ongoing hurdles in key Asian markets.
In essence, the substantial drop in stock price is drawing attention to the immediate challenges that the company is facing. Yet, Estée Lauder is addressing these setbacks from a position of strength, given the inherent strengths of its affordable luxury niche.
2. Estée Lauder is intentionally exacerbating issues
Current problems plaguing Estée Lauder include weak sales in China, post-pandemic recovery complications, and legal costs linked to talcum powder.
Organic sales in the fiscal first quarter of 2025 decreased by 5% compared to the previous year. The company reported a loss of $0.43 per share, marking a significant decline from its $0.09 profit per share in the prior year. However, remove certain one-time expenses, such as talc settlement charges and restructuring costs, and earnings rise to $0.12 per share—an improvement from $0.11 in the fiscal first quarter of 2024.
Managing the crisis, the company is introducing a new CEO during this period of restructuring. It seems that management is trying to disclose as much negative news as quickly as possible, a strategy often referred to as a “kitchen-sink quarter” (during which negative news may extend beyond just one quarter).
The reasoning behind the dividend reduction was particularly noteworthy. According to the company, "We are lowering the dividend to an appropriate payout ratio, which will also provide more financial flexibility for our incoming leadership team." The new leadership team will also commence with a clean slate on the guidance front, as they withdrew long-term guidance as well.
On the surface, these developments might appear unfavorable. However, from a contrarian perspective, it suggests that Estée Lauder is actively working towards a turnaround by addressing problems before the new CEO takes charge.
3. Estée Lauder's news isn't entirely bleak
Besides the negative focus, there are some positive aspects in Estée Lauder's fiscal first-quarter results, which investors seem to be overlooking.
For instance, sales growth in Europe, Middle East & Africa, and the Americas (excluding Asia) emerged as a strong point in the skin care segment. Makeup's star performer, Clinique, achieved a double-digit sales surge globally. In the fragrance segment, where sales dipped by just 1%, Le Labo saw significant sales growth. Lastly, in hair care, short-term challenges led to lower sales, but those should be temporary and may even result in higher sales in future quarters.
While this might appear to be selective reporting of positive news, this is not uncommon on Wall Street, where the focus has primarily been on negative developments.
Every company experiences hardships, and Estée Lauder is no exception. What's important to note here is that the company isn't on the brink of collapse. Furthermore, management's proactive steps, including bringing in a new CEO, will realign investor expectations for the company's future performance.
Estée Lauder's fire sale might end at any moment
While Estée Lauder needs to accomplish the new CEO's targets, careful investors might want to wait for their strategy and some progress before diving in. However, the hidden positive aspects of the business may indicate a promising opportunity for more aggressive investors who can tolerate uncertainty. Miss the opportunity now, and you may miss it entirely.
In light of the company's financial challenges, some investors might see this moment as an opportunity for strategic investing in Estée Lauder's consumer discretionary stocks. Despite the current negative sentiment, the company's strong presence in the luxury niche and diverse portfolio could potentially provide a stable footing for future growth.
Furthermore, the company's intentional disclosure of negative news and the subsequent dividend reduction can be perceived as a proactive step towards addressing the challenges and setting a strong foundation for the incoming leadership team. This shift in strategy might open up new opportunities for investors who are willing to take on some risk.
