Esteé Lauder's Shares Are Selling at Their Lowest in a Decade: Worth the Discount or Not?
Esteé Lauder's Shares Are Selling at Their Lowest in a Decade: Worth the Discount or Not?
If a company's stock hits a 10-year low, it's safe to say that investing in it involves taking on a significant amount of risk. This kind of dramatic sell-off implies that investors are rushing to sell their shares and have serious doubts about the company's future, possibly questioning its ability to survive.
Estee Lauder Companies (EL) has recently dipped to levels unfamiliar to it for over a decade. As of the latest close, the stock has suffered a massive 56% loss this year. Let's delve into the challenges plaguing Estee Lauder and consider if this heavily discounted stock is on the brink of further decline or if it could present an intriguing contrarian purchasing opportunity.
Estee Lauder's revenue and profitability on a downturn
Businesses haven't been faring well for Estee Lauder in recent years. Revenue has been dwindling, while profits have been declining at an even faster pace. Given this double whammy, it's hardly surprising that the stock has been suffering such a dramatic downturn.
On its latest earnings report, released a month ago, Estee Lauder pointed to a faltering market, particularly in China, where consumer optimism was waning. The company wasn't even optimistic that economic stimuli in the country would have a significant impact for quite some time.
To make matters worse, the company announced it would be reducing its quarterly dividend to $0.35, a decrease of 47%. For investors who might have been hoping for a turnaround from the cosmetics company, this gave them one less reason to hang on and led to a further decline in the stock price.
Is Estee Lauder a worthy investment?
Estee Lauder has been grappling with profitability in recent quarters, causing its price-to-earnings (P/E) multiple to skyrocket to over 100. Even considering analyst forecasts, it's trading at roughly 37 times next year's profits, a high multiple for a company that isn't expanding. The stock is trading at 1.5 times its trailing revenue, which might seem reasonable, but isn't likely to hold much appeal for investors if the revenue stream continues to dwindle.
To reboot its business, Estee Lauder not only needs to grow but also to improve its bottom line. For the quarter ending on September 30, the company's selling, general, and administrative expenses accounted for 94% of its gross profit. Despite achieving high gross profit margins of more than 70%, there's a pressing need to reduce overhead expense if the company is to remain financially stable.
Given the company's poor revenue performance and high expenses, it's challenging to justify paying more than 30 times next year's earnings for Estee Lauder; it's not an attractive investment unless a significant turnaround is expected.
Should you consider investing in Estee Lauder stock?
Estee Lauder is currently undergoing a restructuring process and has a new CEO, Stéphane de La Faverie, who took the reins recently. All this is happening while markets face considerable economic uncertainty as consumers seek to cut costs in the face of inflation. It certainly isn't an easy environment for Estee Lauder to regain its footing and put its operations back on track.
This is a stock that will only appeal to investors with a high risk tolerance. There's simply too much that management needs to address before this company can become an attractive investment once more.
At the very least, investors who are considering purchasing the stock might want to adopt a wait-and-see approach, evaluating the new CEO's strategy and determining whether the company is looking healthier in the upcoming quarters. If it isn't, there could still be ample room for the consumer-goods stock to plunge even further in value.
In light of Estee Lauder's financial struggles and the high risk associated with its stock, some investors might choose to allocate their finance towards more secure investments, opting to keep their money away from this volatile market. On the other hand, those with a high risk tolerance and a belief in Estee Lauder's potential turnaround might decide to invest in the company, hoping to capitalize on its significant discount and future growth.