On Tuesday, Morgan Stanley adjusted its outlook on Estee Lauder (NYSE:EL) shares, reducing the price target from $140.00 to $100.00, while maintaining an Equalweight rating. The firm cites multiple challenges influencing its decision, including sector weaknesses, particularly in China and travel retail, as well as Estee Lauder's market share difficulties in these areas.
Estee Lauder's long-term structural growth is under scrutiny due to a combination of factors. The firm has faced a rapid series of negative earnings per share (EPS) revisions in recent years. In response, Morgan Stanley has lowered its FY25/26 EPS estimates by 20% and 14% respectively. The new price target is based on a 21x FY26 EPS multiple, which is at the lower end of Estee Lauder's historical range and its growth peers, reflecting the company's ongoing struggles.
The company's potential for profit recovery and cost savings under the Performance Reboot Program (PRP) is acknowledged, but it is also seen as uncertain. Additionally, there is a need for reinvestment and execution improvements. The guidance for the fourth quarter and fiscal year 2025 highlights the difficulty in achieving long-term structural top-line growth, with slower recovery in key markets like China and travel retail, as well as modest sequential category pressure in North America.
Estee Lauder's market share issues are further compounded by inconsistent quarterly performance and execution challenges. The company is also facing significant risks as it implements the PRP program and undergoes management changes, including a new CFO and the anticipated appointment of a new CEO. While the appointment of a new CEO could potentially be positive, it remains an uncertain factor.
In conclusion, Morgan Stanley's stance on Estee Lauder remains unchanged at Equalweight, reflecting a cautious outlook amid the company's various execution risks and uncertain long-term growth prospects.
In other recent news, Estee Lauder has seen several significant developments. The company's Profit Recovery and Growth Plan (PRGP) is on track, with expectations to deliver between $1.1 and $1.4 billion in net profit over fiscal year 2024 levels. However, Estee Lauder's first quarter fiscal year 2025 forecast fell short of analyst expectations, leading DA Davidson to revise its earnings per share (EPS) estimate for the company, reducing it by $1.28, or 30%, to $2.95.
Despite declining sales in China and Travel Retail, Estee Lauder remains committed to implementing its PRGP, focusing on high-end fragrances, online channels, and precision marketing. Deutsche Bank, Evercore ISI, and DA Davidson have all adjusted their price targets for the company, reflecting a cautious outlook due to management transitions and challenging market conditions.
CEO Fabrizio Freda has announced his retirement, initiating a search for a successor. As part of their future plans, Estee Lauder intends to launch the Balmain Beauty brand, expand its luxury portfolio, and build a distribution center in Hainan to improve stock normalization in travel retail.
InvestingPro Insights
As Estee Lauder navigates through its current challenges, including market share difficulties and a cautious outlook from analysts, the latest data from InvestingPro provides a detailed perspective on the company's financial health and market performance. Estee Lauder's market capitalization stands at $33.31 billion, indicating its significant presence in the industry despite recent setbacks. The company's gross profit margin impressively remains at 70.77%, highlighting its ability to maintain profitability in the face of revenue declines, as seen in the last twelve months up to Q3 2024.
InvestingPro Tips suggest that Estee Lauder has maintained dividend payments for 29 consecutive years, which could be a sign of financial stability and a commitment to returning value to shareholders. However, analysts have revised their earnings downwards for the upcoming period, reflecting the concerns raised by Morgan Stanley regarding the company's earnings per share and structural growth challenges.
With the stock experiencing a significant price drop over the past six months, down by 35.38%, and trading at a high earnings multiple of 53.38, investors may exercise caution. The InvestingPro platform lists several additional tips that could further guide potential investment decisions regarding Estee Lauder. For those looking to delve deeper into Estee Lauder's financials and market performance, more insights are available at InvestingPro.
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