Estee Lauder’s Price Target Raised to $233 on Strong Skincare Business, $275 in Best-Case Scenario: Morgan Stanley

Estee Lauder’s, one of the world’s leading manufacturers and marketers of quality skincare, price target was raised to $233 from $196, largely driven by expectations of higher growth in the skincare business, according to Morgan Stanley equity analyst Dara Mohsenian, who also said key value drivers will remain intact in the long-term post-COVID-19 crisis.

Estee Lauder’s shares traded about 3% higher at $212.59 on Monday. The stock gained more than 50% since March low and is up over 3% so far this year.

On August 20, the Estee Lauder reported net sales of $14.29 billion for its fiscal year ended June 30, 2020, a decrease of 4% from $14.86 billion in the prior-year period. The net sales decline was driven by retail store closures as a result of the global spread of COVID-19 that was partially offset by the tremendous acceleration online.

However, skincare net sales grew across most regions, led by Estee Lauder and La Mer. The category increased 26% in the first half of the fiscal year and was the most resilient category globally during the pandemic. Origins also increased net sales.

The company forecasts long-term growth of 6% to 8%, 50 basis points of operating margin expansion and double-digit adjusted diluted earnings per share growth in constant currency after a period of normalization as the impacts of COVID-19 subside.

“We also continue to believe that Estee Lauder’s (EL) recent mix shift to its skincare business is underappreciated by the market, as EL’s mix has rapidly shifted to this segment at 101% of EL’s profit mix in FY20, or even 75% in FY19 pre-COVID, vs ~50% historically in FY16-17. We view skincare as a crown jewel, as it is both a much higher growth area within the beauty category over time given a consumer focus on health/wellness and anti-ageing, as well as greater pricing power with high barriers to entry, which also gives us confidence in the sustainability of higher topline growth/margin over time. EL’s skincare business grew at a 10% sales CAGR in the last decade pre FY20, 12% in the last five year and 19% in the last three years,” said Dara Mohsenian, equity analyst at Morgan Stanley.

“Premium skincare is a higher-growth, higher-margin category, outperforming premium make-up and mass skincare category growth globally, giving us greater confidence that EL’s momentum is supported by secular trends. Looking at global premium skincare growth weighted by EL’s geographic mix, the category has posted robust +6.5% growth over the last 10 years, with at least +4% growth for every year since the turn of the decade, and growth of more than +5% for all but one year in the same time frame. Given Euromonitor excludes travel retail growth, we think that these numbers actually understate premium skincare growth, and we note that EL has continued to gain significant skincare market share even as the category has become increasingly competitive,” Mohsenian added.

Morgan Stanley target price under a bull-case scenario is $275 and $158 under the worst-case scenario. Several other equity analysts have also updated their stock outlook. RBC raised to outperform from sector perform and upped target price to $240 from $194. Estee Lauder Companies had its price target raised by equities research analysts at Citigroup to $220 from $194. The firm presently has a “neutral” rating on the stock. Stifel Nicolaus lifted their price objective on Estee Lauder Companies from $185.00 to $235.00 and gave the company a “Buy” rating.

Fourteen analysts forecast the average price in 12 months at $221.50 with a high forecast of $244.00 and a low forecast of $180.00. The average price target represents a 2.93% increase from the last price of $215.20. From those 14, 11 analysts rated ‘Buy’, two analysts rated ‘Hold’ and one rated ‘Sell’, according to Tipranks.

“We are Overweight Estee Lauder (EL) as we view long-term EL growth as more robust and sustainable than peers with its large exposure to the high growth, high margin skincare segment, e-commerce and expansion opportunity in China, and a potential rebound in near-term COVID impacted business. We assume EL recovers to pre-COVID EPS levels by FY22, with margins supported by cost-cutting,” Morgan Stanley’s Risinger added.

“We view EL’s valuation as compelling, corroborated by our DCF analysis. Sum-of-parts valuation vs peers similarly points to the upside.”

Upside risk: Lower than expected COVID impact, particularly in China/travel retail, a category growth rebound in prestige beauty, market share gains in key categories, favourable FX movements -highlighted by Morgan Stanley.

Downside risk: Prolonged COVID-19 impacts, China results slow with tariff/boycott risk, category growth deceleration, macro conditions worsen, market share losses, competitive pricing, and unfavourable FX.