3 Reasons EL is Risky and 1 Stock to Buy Instead

Over the past six months, Estée Lauder’s stock price fell to $89.27. Shareholders have lost 5.7% of their capital, which is disappointing considering the S&P 500 has climbed by 10.9%. This may have investors wondering how to approach the situation.

Is now the time to buy Estée Lauder, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Estée Lauder Not Exciting?

Even with the cheaper entry price, we’re swiping left on Estée Lauder for now. Here are three reasons why there are better opportunities than EL, plus one stock we’d rather own.

1. Core Business Falling Behind as Organic Sales Decline

When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.

Estée Lauder’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 2% year on year.

2. Breakeven Operating Margin Raises Questions

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Estée Lauder was roughly breakeven when averaging the last two years of quarterly operating profits, lousy for a consumer staples business. This result is surprising given its high gross margin as a starting point.

3. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Estée Lauder, its EPS declined by 16.5% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

Estée Lauder isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 30.1× forward P/E (or $89.27 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.

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