We came across a bullish thesis on The Estée Lauder Companies Inc. (EL) on Sleepysol’s Newsletter’s Substack by Sleepysol. In this article, we will summarize the bulls’ thesis on EL. The Estée Lauder Companies Inc. (EL) share was trading at $88.75 as of Oct 29th. EL’s trailing and forward P/E were 82.18 and 31.06 respectively according to Yahoo Finance.
A female customer shopping for beauty products in a modern store.
Estée Lauder is a renowned high-end brand offering premium makeup, skincare, and beauty products, a position that grants it significant pricing power. The concept of the “lipstick effect” demonstrates this well: consumers rarely downgrade once they experience premium products. However, this advantage has been largely overshadowed by a severe demand issue in China, historically one of EL’s most significant growth drivers. Like other top brands, from Nike to LVMH, EL benefited immensely from the rise of the Chinese consumer. Yet, as China’s economic slowdown continues, EL faces considerable revenue, margin, and earnings pressure—impacts felt not only in China but also across Japan, EMEA, and other regions, due to the influence of Chinese tourism and spending abroad.
An additional challenge has been the overordering of inventory in 2020 and 2021, which created an oversupply that’s been dragging down margins ever since. While management anticipates margin recovery as these inventory issues clear out, EL’s operational margin guidance has fallen from historical levels of 16–18% to just 11–11.5% for fiscal 2025. Management hopes to address these issues with a cost-cutting plan targeting a $1 billion reduction, spread over fiscal years 2025, 2026, and beyond, yet any substantial margin improvement will likely require stronger Chinese demand.
Despite these challenges, there are reasons to consider a turnaround. If EL can stabilize China’s revenue decline and clear inventory, its EPS could exceed the current $2.85 midpoint estimate for FY 2025, trading at a valuation closer to 20–23 times earnings, rather than today’s nearly 30. A new CEO is expected to be appointed in early 2025 as the current CEO retires, a change which could align with EL’s projected inflection point in channel clearing. Coupled with potential government stimulus in China and improving sales from emerging markets like Mexico and Brazil, these factors could support EL’s recovery.
While the South American market shows promise, some investors worry about EL’s ability to defend market share should China’s demand remain weak and other brands encroach. EL does not need explosive growth in China to bolster its valuation—steadying sales would suffice, allowing EL to focus on growing markets and resuming above-trend growth of 2–3% annually in global beauty. The bull case for EL doesn’t rely on China’s full recovery but rather on stabilizing its performance in that critical market.
The Estée Lauder Companies Inc. (EL) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 47 hedge fund portfolios held EL at the end of the second quarter which was 51 in the previous quarter. While we acknowledge the risk and potential of EL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.