Estée Lauder stock (ticker: EL) was sliding on Monday, hurt in part by a downgrade from Piper Jaffray.
Analyst Erinn Murphy argued it is time to take some money off the table ahead of the beauty brand’s next earnings report, due later this week.
The back story. Estée Lauder shares have jumped 43% year to date, more than double the gains seen by the S&P 500 over the same period. The company has done well in terms of earnings this year, rising most recently after reporting upbeat results in August. (Chief Executive Officer Fabrizio Freda was also named one of world’s best CEOs by Barron’s earlier this year.)
What’s new. On Monday, Murphy lowered her rating on Estée Lauder to Neutral from Overweight, and cut her price target by $6 to $204. She emphasized that the call doesn’t reflect any specific concerns about the coming fiscal first-quarter report, slated for Thursday, or any negative revision to full-year guidance. Rather, her move to the sidelines is because Estée Lauder—as well as peers—will have to grapple with softer consumer spending in the makeup category (at least in the Western Hemisphere). That could lead the shares to trade at a slightly lower multiple, making further gains more difficult.
Looking ahead. Murphy cites her firm’s research, which shows that female teenagers, especially upper-income ones, report wearing fewer cosmetics than in the past. One-fifth of the more well-heeled respondents said they wear no makeup at all. Teen trends are often a leading indicator, Murphy notes. Commentary from other beauty firms reinforce the idea that makeup spending in the U.S. may be hitting a rough patch, ahead of what might be a promotion-heavy holiday shopping season for department stores.
But Murphy thinks Estée Lauder still has plenty to recommend it. The company is strong in skin care, a category that has been doing well. It has also been resilient in fast-growing Asian markets in recent quarters, showing little sign that the trade war is hurting its business. Still, the stock’s near-term upside might be limited with ongoing geopolitical uncertainty and softer makeup sales trends.
Estée Lauder was down 1.3% to $186.13 in recent trading.
Write to Teresa Rivas at [email protected]