Key Takeaways:
- The 2-Minute Valuation Model values Estée Lauder stock at $93/share in just under 2 years.
- This implies that the stock has over 20% upside from its current share price.
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Estée Lauder has fallen over 75% in the past 3 years, driven by weak performance in travel retail, slower recovery in key international markets like China, and evolving consumer preferences in the beauty industry:
Nevertheless, Morningstar continues to rate Estée Lauder as a wide-moat company due to its strong portfolio of luxury beauty brands. Estée Lauder is still figuring out the proper strategy to navigate shifting consumer trends and rebound from challenges in its key international markets.
Estée Lauder remains a leader in the beauty industry. Today, it looks like Estée Lauder is slightly undervalued.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share, or EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Estée Lauder Looks Undervalued
Forecast
On Estée Lauder’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at around a 1% compound annual growth rate over the next 2.5 years, with normalized earnings per share, or EPS, expected to grow at roughly 11% annually:
View Estée Lauder’s full analyst estimates >>>
Profit margins are expected to rebound, which is why EPS is expected to grow at double-digit rates while revenue is expected to stay just about flat.
For context, Estée Lauder’s revenue grew at about 1% annually over the past 5 years.
Valuation Multiple
Estée Lauder currently trades at around $74 per share, which means the stock trades at just over 2 times next year’s expected revenue and nearly 44 times next year’s expected earnings.
Estée Lauder has averaged a 40x forward P/E multiple over the past 5 years, but just to be conservative, we’ll use a 25x P/E multiple in our valuation.
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At a 25x P/E multiple, Estée Lauder still looks slightly undervalued.
Fair Value
2 and a half years from now, Estée Lauder is expected to reach about $3.58 in normalized EPS. At a 25x NTM P/E multiple, that values Estée Lauder stock at $90/share. We can add an extra $3 per share for the dividends that the company is expected to pay, bringing the final fair value to $93/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 1.5-year valuation uses 2.5-year EPS forecast figures. We’re using a 1.5-year valuation because Estée Lauder’s fiscal year ends in June, halfway through the year.)
With the stock trading at about $74 today, this implies that Estée Lauder stock could rise 16.5% per year over the next year and a half, or 26% in total, to reach this fair value:
The market has averaged about 10% annual returns over the long run, so if the stock rose to this fair value, the annual returns would exceed the market’s long-term average.
Estée Lauder stock could be appealing for investors looking to invest in a conglomerate built on strong brands.
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Analysts’ Price Target
The consensus analyst price target for Estée Lauder today is about $83 per share, which means analysts think the stock has about 12% upside from its current price.
The graph below shows that when the blue line was high, analysts saw the stock as undervalued. When the blue line was low, they viewed it as overvalued.
Estée Lauder’s stock has been falling for the past 3 years, and you can see that analysts lowered their price targets as the stock fell. However, it looks like analysts are starting to think the stock could be undervalued.
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, looking at analysts’ consensus price targets can be a great way to get a “second opinion” on your own stock valuation.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Estée Lauder stock is slightly undervalued today, and the stock could go up over 25% over the course of a year and a half.
Don’t take our word for it—try it out for yourself! Analyze Estée Lauder or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
