Key Points
Estee Lauder is experiencing a downtrend and is unlikely to reach its bottom due to challenges in the international business.
e.l.f. is gaining market share, growing, and raising its guidance.
Ulta Beauty is facing concerns about slowing growth, but it has the potential to rebound based on strong Q3 results.
We prefer 5 other stocks over e.l.f. Beauty.
Estee Lauder Companies Inc. NYSE: EL is expected to regain traction. Despite positive trends in the beauty industry, it faces significant challenges in the short term. Therefore, it is projected that Estee Lauder stock will be a viable investment in 2025, but not until later in 2024. In the meantime, companies like e.l.f. Beauty Inc. NYSE: ELF and ULTA Beauty Inc. NYSE: ULTA have been gaining traction and market share, offering attractive potential returns for investors.
Estee Lauder’s stock performance declines despite solid results
Following the release of their Q3 reports, both Estee Lauder and e.l.f. Beauty have seen their stock prices decline. The difference is that Estee Lauder’s downtrend is expected to continue, with the possibility of setting new lows, while e.l.f.’s market is showing support after a correction. Estee Lauder’s results were negatively impacted by a decrease in guidance, whereas e.l.f. Beauty’s results were positively influenced by an increase in guidance.
Estee Lauder’s results were better than expected, but challenges related to its size and scope affected the outlook. While the company had solid performance in most segments and regions, weaknesses in key areas such as skin care, hair care, emerging markets, and Asia offset the strengths. In terms of guidance, challenges in overseas beauty markets are expected to persist and potentially worsen.
As a result, management reduced its guidance for Q3 and the financial year 2024, with a substantial decline. Earnings for the year are projected to be below $2.50, compared to a pre-release consensus of $3.65, which may have been overly optimistic. The ongoing conflict in Israel has disrupted international travel, which has a significant impact on Estee Lauder’s business. This conflict is expected to be a long and complex event.
One of the major concerns for EL investors is the potential risk to the dividend. The new guidance puts the payout ratio close to 100%, which is difficult to sustain. Although the company is currently well-capitalized, there are concerns that the distributions could be reduced or suspended if the business recovery does not materialize. The suspension of annual dividend increases has already had a significant impact on share prices.
e.l.f. Beauty gains market share in a key category
e.l.f. Beauty is in a much better position than Estee Lauder, with its business being about 1/10th the size. The difference is that e.l.f. products are resonating with consumers, resulting in the company gaining market share. This is unfavorable for Estee Lauder but beneficial for e.l.f. investors, who can expect another year of solid growth.
In its Q2 results, e.l.f. Beauty demonstrated strength in both top and bottom-line performance, with a 570 basis point improvement in gross margin. The company also increased its revenue target to a minimum of $896 million, compared to the previous high end of $802 million. There is a possibility that guidance will be increased again with the Q3 results.
Analysts see potential upside for both Estee Lauder and e.l.f. Beauty, although EL shares are expected to be negatively affected by market sentiment this year. Analysts covering Estee Lauder are rapidly lowering their targets and may continue to do so until positive signals are observed in the results. On the other hand, analysts are supporting e.l.f. investors, with a consensus estimate that is more than 200% higher compared to the previous year. This estimate implies a 40% upside potential and is expected to increase further after the Q2 release. If this trend continues, ELF stock is likely to reach a bottom and begin rebounding soon.
Ulta Beauty: Ready for a comeback
Ulta Beauty is likely to exceed analysts’ consensus estimates, but the question remains as to the extent of the impact on its guidance. The company is projected to sustain growth in 2024, albeit at a slower pace compared to the double-digit growth seen in previous years. Strong guidance could serve as a catalyst to revive the market. According to analysts’ data, this stock is currently trading near its lowest point, with a potential upside of 40%.
