The Estée Lauder Companies (EL) reports fourth quarter and full year fiscal 2013 earnings tomorrow before the market open. Fundamentally, we hold a favorable view of this stock but, at current levels, are waiting for price to confirm above the intermediate-term TREND line illustrated in the chart below.
Recent Underperformance: Over the last year, EL has underperformed versus the S&P 500 as well as Consumer Staples (XLP) and Prestige Cosmetics peers. Recent downgrades, coming as a result of a top-line miss in 3QFY13 and less consistent sales performance – according to industry data – have weighed on the stock’s performance.
What Would Get Investors Behind The Name: Our fundamental outlook for EL over the intermediate-term TREND duration is positive but we would stop short of taking on “open-the-envelope” risk ahead of the quarter. We believe the company’s demonstrated ability to grow its market share while improving operating leverage will continue to warrant a premium multiple. Best-in-class earnings growth and a geographically well-diversified business model are key components of the story going forward. We expect investors to be focused on the following points during the upcoming earnings release and conference call:
- Continuing margin expansion (SMI initiative)
- Resolution of challenges stemming from SMI initiative
- Growth runway in emerging markets
- Resilience even in softer economies
- Continuation of strong operating leverage
Rates Dynamic Makes Staples Less Attractive, What About EL? As discussed on Hedgeye Macro’s 3Q themes call, the prospect of rates rising is unfavorable for the XLP (and other sectors that have been sought after for yield). During 2009-2012, the data suggested that many investors sought out staples and other dividend-yielding, stable, sectors for a steady return on investment. This would suggest that much of the capital flowing into staples may have been more focused on yield than fundamentals, which could result in that same capital exiting the group as expectations increase that the Federal Reserve tapers. We would argue that EL is likely to be less impacted by this individual factor than many other staples stocks because, unlike others in the space, the company has been rapidly growing earnings, expanding margins, and paying a meager dividend compared to its peers.
Valuation is not a catalyst but we believe that EL, trading in line with slower-growth stocks such as CL and PG, could represent an opportunity on the long side, certainly relative to the XLP. At this point, however, we’re waiting to learn more tomorrow (8/15) as the company releases earnings and hosts its final earnings call of FY13 at 09:30 ET.
Rory Green
Senior Analyst
