Estee Lauder: Premium Brands and Omnichannel Investments To Fuel Growth; Shares Attractive

We are raising our fair value estimate for Estee Lauder EL to $256 (from $253), which implies 39 times multiple against our fiscal 2025 (June-ending) earnings estimate. The increase is driven by time value, as our increased annual sales growth estimates over the 10-year period (6.1% versus 5.3% prior) are offset by tapered average operating margin assumptions (20% versus 21%) due to a stepped-up manufacturing and selling cost outlook, leaving our net income forecast virtually unchanged. We view Estee shares as attractive, trading at a 25% discount to our intrinsic valuation, and suggest investors looking to ride beauty tailwinds start building a position in this name.

Our 6.1% annual sales growth over the next 10 years is driven by our expectation for mid-single-digit increases in beauty demand and Estee’s ability to outpace the overall market given its top brands and expertise in the attractive premium segment. Excluding fiscal 2023, for which we model an 11% sales decline due to temporary travel retail issues, our sales growth estimates would average 8% in 2024 and beyond, close to the 9% average the past five years. We expect skin care and fragrance to contribute the bulk of growth but anticipate makeup to remain a laggard as Estee works to revive underperforming brands. We have modeled operating margins to expand by 200 basis points to 22% by 2032, relative to 2022, driven entirely by the gross margin line, with the metric up to 77.8% by 2032 (from 75.7%) thanks to favorable channel mix (away from struggling department stores) and efficiency gains. We model some savings in selling costs, which we expect the firm will invest in advertising and research spending to reinforce its premium brand perception.

We continue to believe Estee Lauder has carved out a wide economic moat around its premium-only beauty portfolio, thanks to brand equity built on differentiation in efficacy and consumer experience, in addition to scale-based cost advantages.