Estee Lauder (EL) Downgraded to 'Hold' at Deutsche Bank as Expectations Already Radiant

August 2, 2021 10:20 AM EDT
Get Alerts EL Hot Sheet
Price: $323.13 -0.96%

Rating Summary:
    24 Buy, 7 Hold, 0 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 8 | Down: 8 | New: 9
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Deutsche Bank analyst Steve Powers downgraded shares of Estee Lauder (NYSE: EL) to “Hold” from “Buy” but slightly hiked the price target to $322.00 per share from $320.00.

According to Powers, the FQ4 setup doesn’t provide attractive setup with the stock up 25% year-to-date (+9% over the last two months), and +69% over the past year.

“Given that outperformance, EL is now essentially at an all-time high (both in absolute price and valuation), and the stock (in our view) appears to already be discounting ~$10 in EPS in FY23 ($10 * 36.5x forward P/E discounted back one year to today at a 10% discount rate), with FY4Q results likely to be strong but not overwhelming, and FY22 guidance likely to be not significantly above (and maybe below) consensus,” the analyst argues in his note sent to clients.

“Clearly, EL has a reputation for guiding conservatively, and a predictably prudent FY22 outlook may not raise eyebrows. However, EL also has a reputation for investing upside back into the business (as it should) — likely (in our view) pushing out lofty margin expansion targets coveted by bulls, and thus putting that much more pressure on top-line delivery at current levels to drive EPS upside,” he added.

Despite the downgrade, the analyst remains structurally bullish on ES long-term. Fundamentals are still strong with robust growth supported by emerging market development and developed market recovery.

The company’s business is also fueled by “a structural mix-shift to more profitable skin care categories and digital channels; plus self-help from leveraging tightly controlled overheads, reductions in brick-and-mortar spending, and the opening of a Tokyo manufacturing facility.”

However, a downgrade comes as Powers has already projected these drivers into the base-case scenario. The company is also looking to make new investments in marketing, R&D, and reopened brick-and-mortar/travel channels.

“Clearly, our relative caution could be misguided if China continues to over-deliver, if the market is more willing to pay for potential US/brick-and-mortar-driven upside in the near-term than we appreciate, and/or if EL is able to flow through more PCBA program benefits in FY22/23 than expected. However, for now, we choose to step aside and wait for either a better entry point or clearer validation that our less aggressive base-case assumptions are overly conservative,” Powers concludes.

Shares of Estee Lauder are down a bit more than half a percent in today’s trading session.

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