A deeper look at Estée Lauder
I'm glad I followed my instincts on this one...
I first mentioned global cosmetic maker Estée Lauder (EL) in my September 19 e-mail, writing: "[It] was an incredible growth stock to its peak of about $372 per share in the first few days of 2022... but since then has collapsed by 76%."
In the chart I shared in that e-mail, you can see the collapse:
And as I continued:
Looking at the company's income statement, you can see that revenues have only declined slightly... but profitability has fallen off a cliff – explaining why the stock has done the same:
Estée Lauder has a roughly $32 billion market cap, $6.4 billion of net debt, and the stock is trading 2.4 times enterprise value to revenues and 81.6 times trailing earnings per share (though "only" 31.2 times this year's and 21.3 times next year's consensus analysts' estimates of $2.91 per share and $4.13 per share, respectively).
My quick take is that Estée Lauder was an incredible company... but given the collapse in profits, I'm not sure it still is – I would need to investigate the reasons behind this dismal performance to determine if the company might recover.
And, not to sound like a broken record, I was expecting/hoping to see multiples half of what they are.
My instincts were good that Estée Lauder wasn't very interesting at the price then at nearly $90 per share – because it has subsequently tumbled about 11% to close yesterday at $77.48 per share. Take a look at the drop since my September e-mail:
Many of my readers were interested in Estée Lauder's stock. And with it down further, it gets my value-investor heartbeat ticking a bit faster.
So today, I'll do my usual broad look at the financials and then decide whether the company is worth an even deeper dive in a future e-mail...
To be blunt, the recent news at the company has been terrible:
- Family infighting (this recent Wall Street Journal article has the story: Before She Quit, Jane Lauder Called for Cousin's Ouster at Estée Lauder),
- Management turnover (a new CEO, as the company announced at the end of October in this press release), and
- A terrible earnings report on October 31 that crashed the stock by a staggering 21% that day.
Here's an WSJ article from that day with more on the earnings release and company troubles: Estée Lauder Shares Plunge 21% After It Slashes Dividend: Cosmetics giant warns of lower sales and pulls financial forecasts. Excerpt:
The family feud at Estée Lauder is turning into a financial crisis.
Shares of the beauty giant plunged 21% Thursday after the company slashed its dividend by nearly half and pulled its financial targets for the current fiscal year after reporting another quarter of falling sales.
The moves spooked investors the same week that the maker of its namesake skin creams, Jo Malone perfumes and MAC lipsticks said a longtime insider, Stéphane de La Faverie, would be taking over as chief executive rather than recruiting an outsider to lead a turnaround effort.
The board and members of the Lauder family had been split over whether an insider should run the business or if an outsider was needed, and there was disagreement over how quickly to name a successor, the Wall Street Journal reported.
And as the article continued:
This week, the company also said Jane Lauder, who was passed over for the CEO job, would be leaving her executive role and her cousin William Lauder, the longtime executive chairman, would shift to nonexecutive chairman. The changes mean that no Lauder family member will have a senior executive role.
In a surprise, the board on Thursday cut the quarterly dividend by 47%, to 35 cents from 66 cents, freeing up some cash for the company's restructuring efforts.
No wonder Estée Lauder is down by nearly 80% from its peak to levels not seen in years. So let's dig into the financials...
After looking at a company's revenues and profits, I always like to look at its cash flows and balance sheet – especially when it's a potential turnaround situation.
Looking at Estée Lauder's operating cash flow, capital expenditures ("capex"), and free cash flow ("FCF") over the past 20 years, we can see that the company has been an FCF machine.
While the trend has been downward since the 2021 peak (not coincidentally, also right near the early 2022 peak in the stock), the company continues to generate robust FCF. This is something I really like to see in a turnaround situation:
When we zoom in on quarterly cash flows over the past few years, we can see that it's a very seasonal business... However, the trends have generally been downward – with lower positive FCF in the past two peak fourth quarters and very weak negative FCF in the seasonally worst third quarters for the past three years (note that these are calendar quarters – the 2024 calendar third quarter is the company's fiscal first quarter of 2025):
Overall, the cash-flow trends haven't been good in the past three years – but at the same time, they're better than I would have expected for a company whose stock is down so far from its peak...
Turning to the balance sheet, I was surprised to see that net debt has been rising, given the company's positive FCF:
To understand why, let's go back to the cash-flow statement and see how Estée Lauder has been allocating its FCF...
We can see that it has been a mix: two $1 billion acquisitions in 2019 and 2021, misguided share repurchases as the stock was near its peak (a common mistake among public companies), and a steady dividend (which was just cut by 47% to preserve cash, meaning it's only yielding 1.8% at the stock's current price):
In summary, I'm quite intrigued...
Cosmetics is an excellent business, and Estée Lauder has a strong global brand. Because of these two factors, the company still generates a lot of cash despite being totally mismanaged.
But if the main problem is just bad management – that can be fixed (and the company's new CEO might be a sign of good things to come).
As longtime readers know, I've made massive returns dozens of times in my career by investing in the beaten-down stocks of great companies that have been mismanaged but which bring in an effective new CEO – like McDonald's (MCD), Apple (AAPL), and Chipotle Mexican Grill (CMG).
The setup I see here so far with Estée Lauder warrants an even deeper dive, so stay tuned.
And if you have any insights, I'd love to hear them – I'm always grateful for extra information from my wide range of savvy readers! You can send me an e-mail by clicking here.
Best regards,
Whitney